The Economic Cost of Piracy
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The Economic Cost of Piracy



The economic cost of piracy - 2011

The economic cost of piracy - 2011



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The Economic Cost of Piracy The Economic Cost of Piracy Document Transcript

  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Oceans Beyond Piracy, a program of One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Executive SummaryExecutive SummaryThis report is One Earth Future Foundation’s (OEF) second assessment of the Economic Cost of Piracy.It estimates that Somali piracy cost between $6.6 and $6.9 billion in 2011. Our previous report onthe Economic Cost of Piracy in 2010, estimated that piracy cost the world $7 - $12 billion. That initialreport generated a significant amount of dialogue and feedback on the cost of piracy. This report isthe result of extensive research conducted by OEF with the collaborative participation of multipledifferent stakeholders, and includes significant contributions made by commentators, experts, andothers impacted by piracy. It assesses nine different direct cost factors, and is focused specifically on theeconomic impact of Somali piracy.While the report assesses the cost of piracy for the year of 2011, there were significant changes anddevelopments in piracy throughout that year, and in many ways 2011 was the ‘tale of two years’: Overall, 2011 saw an increase in attacks by Somali pirates. This was driven by a rapid escalation in the number of hostages and hijackings in the first quarter of 2011. As expected, hijackings declined during the monsoon period. But in the last quarter of the year, the anticipated resurgence of piracy following the monsoon period did not eventuate.  number of factors may explain this pattern, including an extended period of monsoonal rough A weather off the coast of Somalia, and the use of deterrence mechanisms such as private armed security. Other developing trends throughout the year included an altered re-routing model where ships transited close to the western Indian coastline (rather than around the Cape of Good Hope); and pirates’ changing use of mother ships from large vessels to smaller fishing boats. Further, 2011 saw a more aggressive response from military forces conducting counter-piracy missions in the region.The project finds that of the total costs of Somali piracy in 2011, the shipping industry bore over 80% ofthese costs, or between $5.3 and $5.5 billion.Oceans Beyond Piracy, a program of One Earth Future Foundation 1
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Factors contributing to the overall cost:  Ransoms: In 2011, 31 ransoms were paid to Somali pirates, totaling around $160 million. The average ransom was approximately $5 million, up from around $4 million in 2010. While 2011 saw a lower success rate for Somali pirates, the increased price of ransoms meant that pirates received greater revenue for fewer hijackings. Insurance: The two major forms of piracy-related insurance are war risk and kidnap and ransom (K&R).  This insurance market has evolved throughout 2011 to reflect continued developments in piracy. The ‘war risk’ region was expanded to include the larger Indian Ocean at the beginning of the year, and many shipping companies have received premium reductions for having private armed security on board ships. The total cost of war risk and K&R insurance was approximately $635 million.  Security Equipment and Guards: A notable trend in 2011 was the rapid escalation in the use of private armed security. The total cost of both security equipment and armed guards in 2011 was between $1.06 and $1.16 billion. Re-routing: In 2011, some ships opted to avoid the piracy high risk area (HRA) by hugging the western  Indian coastline. This report assessed the cost of that re-routing for bulk carriers and tankers, and estimated the cost was around $486 - $680 million in 2011.  Increased speed: To date, no ship has been successfully hijacked that was traveling at 18 knots or faster. Therefore, many ships will ‘speed up’ when transiting the HRA. Since more fuel is burned by ships transiting at faster speeds, these increased speeds are a large added cost. This project finds that the extra costs of increased speeds for containerships alone is around $2.7 billion.  Labor: In 2011, 1,118 seafarers were held hostage, and 24 died. Due to this grave risk, many seafarers are entitled to double compensation when they transit the HRA and/or for the duration they are held hostage by pirates. This study estimates that the total cost of this additional compensation was $195 million.  Prosecutions and Imprisonment: 20 countries have arrested, detained or tried Somali pirate suspects. The total cost of prosecutions and imprisonment was around $16.4 million in 2011.  ilitary Operations: Over 30 countries contributed military forces, equipment, and vessels to counter- M piracy activities in 2011. This report estimates the total cost of administrative and headquarter operations, military vessels, aircraft, and unmanned aerial vehicles to be $1.27 billion in 2011.  Counter-Piracy Organizations: A number of new civil society and multilateral initiatives were launched in 2011 with a mission of reducing piracy, and its impact. This report calculates the total cost of funding and operational budgets for these organizations to be approximately $21.3 million.Oceans Beyond Piracy, a program of One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Executive Summary Authors: Anna Bowden and Dr. Shikha Basnet Project Team:  on Bellish, Jon Huggins, Kaija Hurlburt, Jens Vestergaard Madsen, Maisie Pigeon, J Roberta Spivak. For Comments on the report: More Information about Oceans Beyond Piracy: Anna Bowden Jon Huggins Jens Vestergaard Madsen Program Manager Project Director Project Associate Ph: +1.303.533.1702 Ph: +1.303.533.1710 Ph: +1.303.533.1708 Cell: +1.303.709.5498 Cell: +1.303.709.3776Oceans Beyond Piracy, a program of One Earth Future Foundation 3
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 4 Oceans Beyond Piracy, a program of One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Table Of ContentsContentsExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Introduction and Overview of Piracy Trends in 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Methodological Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8The Direct Economic Costs of Piracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1. The Cost of Ransoms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2. he Cost of Piracy Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 T 3. The Cost of Security Equipment and Guards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4. The Cost of Re-Routing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5. The Cost of Increased Speeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6. The Cost to Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7. The Cost of Prosecutions & Imprisonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8. he Cost of Military Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 T 9. he Cost of Counter-Piracy Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 TThe Economic Impact on Regional Nations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10. A Regional Case Study: The Impact on Kenya . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 11. A Regional Case Study: The Impact on India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Emerging Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 12. Increasing Seafarer Deaths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 13. Increasing Risk of Piracy in West Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 14. Increasing Impact of Piracy on Oil Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37The Total Cost of Somali Piracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Appendix One: Methodology for Calculating Piracy Insurance Premiums . . . . . . . . . . . . . . . . 41Appendix Two: Methodology for Calculating the Cost of Re-Routing . . . . . . . . . . . . . . . . . . . 42Appendix Three: Methodology for Calculating the Cost of Increased Speed . . . . . . . . . . . . . . . . . . . . 43Appendix Four: Methodology for Calculating the Cost of Military Operations . . . . . . . . . . . . . . 45Appendix Five: Methodology for Calculating the Impact on Kenya’s Tourism Industry . . . . . . . . . 46References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Oceans Beyond Piracy, a program of One Earth Future Foundation 5
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Acknowledgements Acknowledgements A number of experts and key stakeholders gave us crucial advice, guidance, and assistance during the completion of this report, for which we are extremely grateful. We would like to thank Sir James Burnell- Nugent, for his assistance in advising on data sources, as well as his thoughts on methodologies for calculating the impact of piracy. Thank you also Peter Sand, BIMCO, for his contribution and guidance on utilizing the BIMCO re-routing calculator for our calculations. To Michael Frodl, for continuing to advise Oceans Beyond Piracy on piracy developments and trends. Finally, sincere thanks to the International Maritime Bureau for their collaboration and providing One Earth Future with requisite data for this study.6 Oceans Beyond Piracy, a program of One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 AcronymsAcronyms BIMCO The Baltic and International Maritime Council BMP Best Management Practices CGPCS Contact Group on Piracy off the Coast of Somalia DWT Dead Weight Tonnage EUNAVFOR European Union Naval Force GCC Gulf Cooperation Council HRA High Risk Area IMB International Maritime Bureau IMO International Maritime Organization ITF International Transport Workers’ Federation K&R Kidnap and Ransom (Insurance) LMA Lloyd’s Market Association MSC HOA Maritime Security Center, Horn of Africa NATO North Atlantic Treaty Organization OBP Oceans Beyond Piracy OEF One Earth Future Foundation Trust Fund The Trust Fund to Support the Initiatives of States to Counter Piracy off the Coast of Somalia UAV Unmanned Aerial Vehicle UN United Nations UNCTAD United Nations Conference on Trade and Development UNODC United Nations Office of Drugs and Crime UNSCR United Nations Security Council Resolution VLCC Very Large Crude Carrier WFP World Food ProgramOceans Beyond Piracy, a program of One Earth Future Foundation 7
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Introduction and Overview of Piracy Trends in 2011 Introduction and Overview of Piracy Trends in 2011 In 2011, Somali pirates attacked 237 ships, and successfully hijacked 281. Piracy impacts multiple stakeholders, none more so than the seafarers attacked, held hostage, or killed. This report specifically analyzes the economic impact of Somali piracy. It estimates that the total cost of piracy in 2011 was between $6.6 and $6.9 billion. This report is second assessment of ‘The Economic Cost of Piracy’, with One Earth Future Foundation (OEF) previously analyzing the cost of piracy for 2010. Given interest in the initial report, including feedback from many stakeholders who claimed it was a useful tool for analysis, as well as ongoing developments in piracy, OEF decided to re-issue the study to assess the costs of piracy for 2011. Note that the present report focuses solely on Somali piracy, and excludes piracy in other regions. In assessing the economic cost of piracy over the course of 2011 we have witnessed a number of concerning developments and trends that warrant attention from the outset: a) Expanding Countries and Regions Affected by Piracy Over the past four years, the location of successful pirate hijackings has ballooned out from a relatively concentrated area in the Gulf of Aden and off the coast of Somalia, into the larger Indian Ocean. In 2011, we saw a larger number of hijackings occurring to the northeast of Somalia and the Gulf of Aden. The evolving distribution of Somali piracy attacks for 2008 - 2011, is shown at right. 2 The changing geographical spread of piracy attacks also alters the countries, industries, and trade routes most impacted by piracy. For example in 2011, piracy has increasingly impacted India, Pakistan, and the Gulf countries. This transformation in the location of piracy attacks also indicates that there may be an escalating impact on the oil-supplying industries and nations within that region, as discussed later in this report. b)  evelopments in Ship Hardening and D Private Armed Security In 2011, we witnessed a significant growth in the use of private armed security to protect against piracy attacks, as discussed in Section 3. We also saw the increasing use of citadels (safe rooms) where crews can seek shelter in the event of a piracy attack. These self-defense methods, particularly private armed security, have generally been considered successful in deterring piracy attacks. One of the persistent questions related to private armed security is whether they will continue to be used in the long-term, or even permanently. In either case, their continued use will be a significant ‘cost of piracy’ to the shipping industry.38 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Introduction and Overview of Piracy Trends in 2011 c) Developments in Re-Routing Volumes and Trends Our previous report in 2010 estimated that the largest economic cost of piracy resulted from ships re-routing to avoid the entire high risk area (HRA) affected by Somali pirates. At that point, we understood that a small proportion of ships were even redirecting their voyages around the Cape of Good Hope to avoid pirate-prone regions. In 2011, as a result of a number of factors discussed in Section 4, this report no longer calculates the cost of re-routing around the Cape of Good Hope, and instead focuses on ships re-routing by hugging the western Indian coastline. We have calculated that this version of re-routing adds only one extra day to the average voyage (for a journey from East Asia to the Gulf of Aden), thereby reducing the aggregate cost of re-routing for 2011.Methodological ChallengesWhen we launched our study on the Economic Cost of Piracy in 2010, we noted the significant difficultieswe faced in accurately assessing piracy’s impact. Many of the 2010 calculations were rough estimations,which were intended to initiate an informed dialogue on the cost of piracy. The report instigated a largeamount of both positive and critical feedback, all of which was very useful. Importantly, this feedbackallowed us to collaborate with multiple stakeholders from industry, government, and civil society, inorder to improve the assumptions and calculations in this model.While this feedback and discussion was critical in helping us shape the present report, it is importantto note that many of the assertions in this report are still estimations. In 2011 (as in 2010) we faced anumber of tough challenges in accessing and analyzing robust data that could be used to accuratelyassess piracy’s impact. Some of the major difficulties we faced included: ata limitations: it remains very difficult to locate and assemble robust data on the economic cost D of piracy. We have analyzed hundreds of reports, articles, and media sources to make our calculations as accurate as possible. But this information is not perfect, and there is certainly data missing. In particular, we have found it challenging to assess ‘aggregate costs’ for the shipping industry. That is, while we may be able to retrieve information on the average cost of insurance premiums; a team of armed guards; or even the excess cost for an individual ship re-routing its voyage to avoid the high risk area; the difficulty lies in determining precisely how many ships pay for these protection mechanisms.  solating the impact of piracy from other economic affects: as we note throughout this report, it I is difficult to isolate the economic impact of piracy from other macroeconomic trends and volatility. This was especially the case in 2011, as the world (and shipping industry) experienced a persistent economic downturn and excess capacity, as well as political instability in the Middle East and North Africa.  Redistribution of economic impact: a recognized limitation of this study is that it does not account for how economic costs and impacts are ultimately redirected to third parties, countries, or regions.One Earth Future Foundation 9
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Introduction and Overview of Piracy Trends in 2011 Indeed in many instances, some countries or industries may even ‘benefit’ from the presence of piracy in another region. For instance, if tourism in Kenya reduces as a result of piracy, might it increase in other countries, like South Africa or Ghana? We regret that we were not able to calculate how economic costs have been redirected or reabsorbed by other stakeholders, or how they even ‘benefited’ some regions or industries. In sum, while these cost estimations are as accurate as possible, they are certainly not perfect. Throughout the report, we are transparent about the methodology, data, and assumptions feeding into our calculations. With no agenda or stake in the piracy issue, we wanted to create a model which could be openly reviewed and challenged. Given the complexity of calculating the cost of piracy, we believe that adequately assessing the cost of piracy requires a collaborative approach, where industry, governments, and civil society, are able to share data and produce increasingly accurate calculations. We invite feedback and dialogue from all stakeholders interested in this issue, and especially welcome data and information from interested parties.10 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy The Direct Economic Costs of Piracy1. The Cost of Ransoms Average hostage situation: 6 months Average ransom: $4.97 million Total ransoms paid: $159.62 millionReceiving multi-million dollar ransoms payments to release hijacked ships is perhaps the first thing thatcomes to mind when we think about the economic cost of piracy. Once a vessel has been hijacked, piratesusually move that ship towards Somalia where it is held hostage while shipping companies negotiate aransom. In 2011, these ransoms become increasingly costly. According to available data, 31 ransomswere paid in 2011, amounting to a total of $159.62 million, with the average ransom being $4.97 million.While the success rate of pirate attacks in 2011 has declined from 27% in 2010, to 13% in 2011, there hasbeen an increase in both the number of attempted attacks (from 152 in 2010, to 189 in 2011), as well as theransom price5. In other words, pirates have been securing equal or greater value for less hijacked vessels.2011 also saw the highest ransom paid on record. In April, $13.5 million was paid to release the Irene SL,a Very Large Crude Carrier (VLCC)6. The Greek flagged Irene, hijacked on February 9, 2011, was carryingtwo million barrels of oil valued at $200 million (the equivalent of 20% of one day’s worth of the US’scrude imports)7. The hijacking occurred only three months after the former highest ransom on recordhad been paid to release the Samho Dream, a South Korean oil tanker, for $9.5 million8.It is of great concern that hijackings and ransom payments are taking longer to negotiate. According toour calculations, on average it took 178 days, or around six months for a ransom to be negotiated, and aship released. Many vessels and their crew were held hostage off the coast of Somalia for a distressing12 months or longer. For instance, the Iceberg I and its 24 crewmembers have remained in captivity sinceMarch 2010. The Iceberg’s crew is said to have suffered severe psychological and physical harm, and onecrew member committed suicide by jumping overboard in October 20109.One Earth Future Foundation 11
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy In 2010’s Economic Cost of Piracy report, we made a rough estimation of the total value of ransoms paid to Somali pirates. In that study, we employed an estimation made by the General Insurance Research Organising Committee (GIRO) that the average ransom in 2010 was $5.4 million.10 Upon further investigation of data subsequently made available, we now believe the average ransom in 2010 was lower than this figure, likely closer to $4 million.11. In 2011, we have taken a more robust approach to assessing ransoms, and have tracked and accounted for each individual ransom paid in 2011 (where data was available). The table below lists ransom payments12 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy for hijacked vessels in 2011. Note that some of these vessels were hijacked in 2010, but were not released until 2011. We include all ransoms paid in 2011 in order to analyze the 2011 ‘ransom price’ market. In 2011, we also witnessed a worrying development in the ransom business model. In some instances, after receiving a ransom, pirates have released the vessel but not all of the crew. In other cases, the vessel has been abandoned, and hostages have been taken ashore in Somalia, where pirates have demanded a ransom for their release. Two examples highlight this distressing trend: sphalt Venture: The Asphalt Venture was captured in September 2010. In April 2011, $3.6 million A was paid to release the ship, but pirates continued to detain seven Indian crewmembers, of whom two are reported to have died while in captivity14. The pirates claimed that the Indians would not be released in retaliation against India’s arrest and detention of around 120 suspected Somali pirates.15 Choizil: The South African yacht was captured in October 2010. In November 2010, the yacht ran aground.  The skipper refused to abandon the vessel, and was later rescued by naval authorities. However, the other two sailors were taken ashore to Somalia, where they continue to be held for ransom by pirates.16As noted in our 2010 report, the ‘cash value’ of the ransom paid to pirates is not the only cost of hijackings.The total cost incurred by shipping companies is expanded by a number of factors, including the delivery of theransom, which is most frequently conducted by a light aircraft dropping waterproof containers of cash in USdollars into the water.17 In May 2011, the Transitional Federal Government of Somalia arrested three Britons,two Kenyans and one American at Mogadishu airport, for attempting to deliver a ransom of over $3 million. Thesix foreigners were subsequently pardoned, but fined $100,000 for the release of their aircraft.18Other excess costs include damagecaused to the vessel while it is held, thecost of negotiators, consultants andlawyer fees, and psychological traumacounseling for crew members.19.Further, there is a high cost of havingships held and out of service. Forexample, at charter hire rates ofperhaps $17,500 per day, a bulk carrierheld hostage for six months could costas much as $3.15 million in unrealizedcharter hire rates alone20. Indeed,according to Stephen Askins of Ince & Co., the excess costs of having ships held hostage for months onend is potentially as large as $20 million for a $4 million ransom. Each ship owner and insurance companytherefore must conduct a delicate cost-benefit analysis when negotiating for a ship’s release: the incentiveto drive down the ransom price, and ‘wait out’ a reasonable negotiation must be contrasted with the highcost of having ships out of service, and the considerable impact on the crew.21Since most ransoms are paid under shippers insurance, we do not include the cash value of ransomsin the total cost of piracy. Instead, we account for the above excess costs of ransoms, which we haveestimated to be approximately 100% of the ‘cash value’ of ransoms of $159.62 million.One Earth Future Foundation 13
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy 2. The Cost of Piracy Insurance As ships and their crew members are under increasing threat of pirate attack, shipping companies have naturally sought insurance against attacks and especially as financial protection to pay ransoms. War Risk and Kidnap and Ransom (K&R) are the two primary forms of piracy-related insurance22.  ar Risk: Vessels transiting through ‘war risk areas’ are required to pay war risk premiums. War risk W areas are identified by the Lloyds Market Association (LMA) Joint War Committee, in London.23 As of January 2011, the War Risk zone covers the Indian Ocean, the Gulf of Aden, the Red Sea and the Gulf of Oman24. According to a 2011 study by Marsh, titled Piracy: The Insurance Implications, war risk is the most appropriate form of insurance to cover against pirate attacks, although there are certain benefits to purchasing an ‘extra layer’ of protection under K&R (detailed below)25. A separate report on piracy insurance by Aon also indicated that more losses were covered under war risk premiums than K&R in 201126. War risk premiums may be reduced if ships have armed security guards, or other security equipment such as citadels, razor wire, or sonic deterrent equipment. Compliance with the most recent version of Best Management Practices (BMP) is usually expected as standard, and may be a requirement of underwriting27. Kidnap and Ransom (K&R): K&R insurance  typically protects the crew, but not the vessel or hull (which is insured separately)28. K&R can add a useful additional layer of insurance protection to war risk insurance, and is often used to cover fees for public relations, negotiators, medical and psychological treatment, ransom delivery costs, and travel costs for hostages’ families. Having K&R insurance cover may also reduce the length of the hostage period, and protect against the loss record for war and/or hull premiums. K&R insurers maintain close relationships with hostage negotiators, who bring specialized expertise to ransom negotiations29. The costs of war risk and K&R insurance are not mutually exclusive, and many war risk insurers will reduce premiums for shipping companies who have purchased K&R insurance30. However, this can be difficult for some shipping companies to utilize in practice, since K&R policies often include a requirement that they are kept confidential. In order for war risk insurers to reduce premiums for companies carrying K&R protection, ship owners must obtain the K&R underwriter’s agreement to disclosure31. According to Aon, there has been a large growth in the marine K&R market in recent years, with underwriters receiving premiums as large as the land based K&R market (which has been developing for over 40 years)32. Indeed, we may continue to see the K&R market expand, as we increasingly witness pirates moving hostages off vessels, and taking them ashore into Somalia, where they are held for several months33. Under these circumstances, K&R insurance for crewmembers is crucial34.14 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of PiracyAssessing the global cost of piracy-related insurance is a difficult and contentious task. In our 2010analysis of the cost of piracy insurance, we made a rough estimate that the total cost might fall anywherebetween $460 million and $3.2 billion. The upper bound of this figure was challenged by the insuranceindustry, and this feedback has been very useful in shaping the calculations for the current report.Through discussions with multiple industry and insurance representatives, we have been able to obtaingreater detail about the piracy-related insurance market, and further develop the precision of our study.There continues to be an ongoing debate over the total value of the marine war risks and K&R insurancemarkets. On the one hand, some insurance brokers, such as Willis Group Holdings (the world’s thirdlargest), have stated that piracy is among its ‘fastest-growing’ businesses35. On the other hand, AndrewVoke, Chairman of the LMA Marine Committee has stated that piracy claims have overtaken the incomegained from premiums, and that some underwriters would like to withdraw from the market36. NeilRoberts, Senior Executive for Underwriting at LMA, has estimated that piracy costs ship owners anadditional $160 million a year in premiums.37The challenge of assessing the total cost of insurance continues to be a difficult task due to a lack ofavailable data on total premiums, the variation in premiums for each individual ship, and the variousavailable premium reductions (e.g. the presence of armed guards on ships, security equipment, ormultiple forms of cover).38In 2011, a larger number of vessels were subject to war risk and K&R insurance premiums, due to theexpansion of the war risk area.39 To estimate the number of vessels transiting this area, we have usedinformation from EUNAVFOR’s Maritime Security Center Horn of Africa (MSC HOA). To be in compliancewith Best Management Practices Version Four (BMP4), all ships transiting the HRA are required to registerwith MSC HOA. An October presentation by EUNAVFOR’s Chief of Staff, Captain Keith Blount, showed thenumber of vessels registering with MSC HOA between January and August 2011. From these figures, weestimate the average number of vessels registering each month to be around 2,830, or 33,960 vesselsregistered in 2011.40 Since adherence to BMP (and registration of vessels) is estimated to be around 80%compliant, we presume 33,960 vessels represents approximately 80% of the total.41 Therefore, the totalnumber of vessels transiting is likely to be around 42,450 per year.42We use this figure of 42,450 as the estimated number of vessels subject to piracy-related premiums.Since we were not able to identify the precise makeup of different vessels in the entire risk zone, wehave proxied the type of vessels transiting the Suez Canal, using data from the Suez Canal Authority43.We calculate the proportional representation of each type of ship in the Suez, and use that percentage toestimate the breakdown of ships in the greater war risk region. Of course, this estimation is not perfectand the composition of ship traffic in the entire risk zone will not necessarily be identical to the Suez, butit does provide a starting point for estimations.In order to calculate the cost of war risk premiums, we used estimations by the insurance industry thatthe ‘starting value’ of war risk premiums is around 0.1% of a vessel’s hull value44. Information on thevalue of the hull is taken from the United Nations (UN) Conference on Trade and Development (UNCTAD),Review of Maritime Transport, 201145. We then make some approximations of the various premiumreductions available46. We estimate that all ships receive a 50% ‘no claims bonus’ reduction (becauserelatively few ships make a piracy claim). We then further reduce that value by 50% for those shipspurchasing K&R insurance (which we hypothesize to be around half of all vessels). The final reduction ismade for those vessels purchasing private armed security, which we estimate reduces the premium byapproximately 30%. The reduction for private armed security is applied to 25% of ships47. Further detailson the insurance premium calculations are included in Appendix 1.One Earth Future Foundation 15
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy To calculate the cost of K&R insurance, we use two broad ranges of K&R premium prices, which were obtained from discussions with an insurance industry representative. For ‘low and slow’ vessels (e.g. tankers), which are at the greatest risk of attack, we understand that the average K&R policy costs $15,000 - $20,000 per transit. For ‘high and fast’ vessels (e.g. container ships) K&R policies cost $5,000 - $10,000, on average. Using these figures, we calculate the cost of insurance for each of these two types of ships, using the estimate that 50% of vessels would purchase K&R insurance, as shown in the following table: Combining these cost estimates for war risk and K&R insurance, we estimate that around $635 million in piracy-related insurance premiums were paid in 2011. 3. The Cost of Security Equipment and Guards An increasing number of ship owners are seeking to protect their vessels against pirate attack when transiting the HRA with security equipment and/or private armed (or unarmed) security guards. a) Security Equipment According to the latest (fourth) version of Best Management Practices for Protection against Somalia Based Piracy (BMP4), a number of security measures should be taken by vessels to prevent and defend against a pirate attack. BMP4 describes these ship protection measures as “the most basic that are likely to be effective,” and ship owners are encouraged to conduct a full risk assessment prior to entering the high risk area. Suggested measures include (but are not limited to)49: Enhanced watch keeping, lookout, and vigilance Maneuvering practice Enhanced protection of, and controlling access to, Closed circuit television the bridge Upper deck lighting Razor wire Alarms Water spray and foam monitors Citadels/ safe muster points.16 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of PiracyBecause BMP compliance rates are estimated to be at 80%, we estimated the cost of security measures pership and multiplied by 33,960 unless otherwise indicated (given our estimation that 42,450 ships traversethe HRA each year). We also account for the fact that many forms of security equipment last more than onetrip. We find the aggregate cost of security equipment and guards deployed on vessels in the region to bea substantial cost to the industry in 2011. Commercial vessels have employed everything from barbed wirefences around the ship’s perimeter to private armed guards. Further, as technology advances, the cost ofsecurity measures is expected to continue to rise. b) Private Armed Security In 2011, we saw a rapid escalation in the deployment of private armed security on commercial vessels as adeterrent mechanism against pirate attacks. Over the course of the year, a number of flag states permitted the use of armed security onboard ships. The use of armed guards was also endorsed by the International Maritime Organization (IMO), the International Transport Workers’ Federation (ITF), and some insurance companies59. Varying sources estimate that the additional costs of armed guards are anywhere between $30,000 and $100,000 per transit through the HRA60. According to the Independent Maritime Security Association, the use of a privatearmed security team generally costs around $50,000 per transit61.We have estimated that approximately 25% of vessels transiting theHRA employ armed guards62. It is important to note that this figureof 25% is an estimation of the entire year of 2011. From discussionswith leading shipping industry representatives, we understand thatthe proportion of vessels employing armed guards increased rapidlythroughout 2011, and by the end of the year this figure was closer to50% of vessels.If there are approximately 42,450 transits through the HRA each year, then around 10,612 transits employarmed security. At an average cost of $50,000 per transit, the total costs of private armed security areestimated to be in the region of $530.6 million per year.In addition to the costs of security equipment and guards to the shipping industry, private securitycompanies also incur multiple costs themselves. For instance, there exist accreditation standards forprivate security companies. The Security Association for the Maritime Industry (SAMI) is the mainsuch accreditation body, and on average members pay $3,824 per year. Since the organization hasapproximately 76 members, the totalcosts of licensing accreditation is around$290,624 per year. Note that SAMI is notthe sole licensing body for private maritimesecurity companies, so this number is likelylower than in reality.One Earth Future Foundation 17
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy 4. The Cost of Re-Routing In order to avoid piracy attacks on ships, some ship owners may opt to avoid the HRA altogether. In our 2010 report, we calculated the cost of some ships opting to transit around the Cape of Good Hope rather than through the Suez Canal and Gulf of Aden.64 In our 2011 analysis, multiple trends in piracy and shipping lead us to believe that fewer ships are now opting to re-route around the Cape of Good Hope (although some ships certainly do continue to re-route via the Cape). These factors include: Shipping companies have increasingly placed private armed security on their ships. At the time of writing, no ship with armed guards is believed to have been successfully hijacked. Therefore, many ship-owners appear to find paying for armed security and transiting directly through high-risk zones to be more cost effective than re-routing around the coast of Africa.  pirates expanded their area of operation, the war risk zone has been extended into the larger As Indian Ocean. As a result, there is increasingly “no such thing” as a “piracy safe passage”.65 Suez Canal revenues reached record levels in 2011, which suggests that there was not a substantial re-direction of shipping traffic away from the Suez.66 In August 2011, Egypt’s Suez Canal Authority announced that despite political turmoil in Egypt and surrounding countries, the waterway had collected a record $5.05 billion in the 2010/11 fiscal year, with revenues collected by the Authority increasing by 12.7% on the same period in 2010.6718 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of PiracyDiscussions with multiple representatives from the shipping industry have also confirmed that very fewships are now opting to re-route around the Cape of Good Hope due to piracy concerns, and that mostship-owners consider paying for excess insurance premiums and armed guards to be more economicalthan re-routing around the Cape of Good Hope. According to The Baltic and International MaritimeCouncil (BIMCO), the main factor that might change this economic calculus would be a high enoughincrease in insurance premiums to make transiting around the Cape of Good Hope more cost efficient68.Further, discussions with experts analyzing Automatic Identification System (AIS) data on a regular basishave also affirmed that most shipping traffic does not appear to be re-routing around the Cape.The re-routing we witnessed in 2011 is that of ships hugging the Indian coastline, in an attempt to transitaround the east side of the piracy risk zone. This more moderate model of re-routing adds approximatelyone excess day to an average transit between East Asia (Singapore) and the Middle East (Oman). TheGoogle earth image on the previous page shows the patterns of vessel traffic. The image on the previouspage highlights the pattern of vessel traffic on a given day in November 2009 (yellow) with a given day inNovember 2011 (green)69, while the image below traces the optimal and re-routed routes.In 2011, we utilized BIMCO’s ‘Piracy Cost Calculator’ toassess the cost of re-routing ships. BIMCO’s excellenttool allows for shipping companies and other interestedstakeholders to enter details about an individual ship (suchas charter hire rates, fuel consumption, distance traveledetc.) to assess the cost of re-routing for that particularship.71 Note that in this analysis, we have not included theextra cost of insurance premiums for longer transits northe possible insurance reductions for transiting outside theeastern border of the war risk zone (since insurance costsare calculated separately). Our calculations account forexcess charter hire cost, fuel costs, and opportunity cost(i.e. the longer duration taken) of re-routing vessels.While the image above shows the concentration of 2011 traffic off the Indian Coast and suggests somedevelopments in shipping routes, it still remains difficult to assess precisely how many ships are re-routing.While other types of vessel may indeed re-route, we have opted to conservatively focus on two vessel types- tankers and bulk carriers - given their slower speed and lower bridge, which places them at greater riskof hijack by pirates. In addition, we understand that some tankers are reluctant to have armed guards onboard (due to the possibility of live weapons igniting fuel transported by tankers), and are therefore moresusceptible to attack.Using our calculation of the total vessels transiting the HRA (discussed in Section 2), we estimate that8,375 tankers and 6,626 bulk carriers transited the HRA in 2011. However, since some of these journeysmay be made between the Middle East and Europe, not all of these voyages would opt to hug the Indiancoastline on a North/South transit. Since we were not able to access data on the precise number ofeach vessel type opting to re-route away from the Somali coast line towards India, we have thereforeestimated the cost of re-routing to tankers and bulk carriers when 50% of vessels re-route, and when 70%of vessels re-route, which allows for at least 30% of traffic to be coming to/from the Middle East towardsAfrica/Europe72. It is worth noting that these proportions can be updated in our model, to generatedifferent assumptions, and results. (See Appendix 2 for further details on the methodology used). Underthese specific scenarios, the cost of re-routing in 2011 was between $486 million and $680 million.One Earth Future Foundation 19
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy 5. The Cost of Increased Speed To date, there has not been a successful pirate attack on a vessel travelling at 18 knots or faster. BMP4 therefore recommends that vessels transit at ‘full sea speed’ or at least 18 knots, throughout their transit of the HRA73. This increased speed is an added cost to vessels given that they are transiting at higher speeds than their most ‘economically optimum’ speed. These costs are primarily translated through higher rates of fuel consumption, and therefore greater bunker costs. While all vessel types would find increasing their speed beyond the most ‘cost efficient’ rate an increased cost, we have focused our analysis only on container ships. We selected container ships as a case study since they have the capacity to travel faster than other vessel types, but over the past couple of years have been traveling substantially slower than their full-speed capacity to decrease fuel consumption and costs. According to AP Moller-Maersk, the world’s largest container ship company, the optimum economical speed for container ships is between 10 and 15 knots, rather than their average full capacity of 25 knots74. Indeed, in 2010, AP Moller-Maersk mandated its ships to sail at 12 knots, also known as ‘super slow steaming.’75 A report in 2010 also found the average speed of container ships to be 11.4 knots. For our analysis, we have estimated that the average speed of container ships ‘in the absence of piracy’ is 12 knots. Appendix 3 lists the ‘economical’ and ‘normal’ speed of various vessels, as well as a detailed methodology. As we did for calculating re-routing costs, we have also utilized BIMCO’s Piracy Calculator to assess the cost of increased speeds. BIMCO’s calculator accounts for multiple factors in its cost calculation, including: bunker cost, charter hire, insurance, and opportunity cost. We have not factored charter hire rates or insurance premiums into our calculations. In addition, although in some instances increased fuel costs might be offset by a reduced opportunity cost (i.e. greater delivery speeds, and therefore an increase in the number of deliveries per year), the depressed economic market in shipping and over-supply of ships dilutes this opportunity cost, and we therefore also do not include this in our total calculations. We do however, account for the lower number of ‘burning days’ (i.e. the duration of the voyage which fuel is consumed) for ships traveling at a faster rate, which translates into some savings for a vessel. Our calculations therefore focus exclusively on direct excess bunker costs. We recognize that including all of the different effects on cost would make our analysis more complete, and we regret that we were not able to include all these factors in this analysis. Nevertheless, bunker costs is the major cost component for increased speeds and factoring in insurance and charter hire rates would not significantly alter our estimate. Further, because we have only calculated the cost for container ships, our estimate is a conservative, lower-bound approximation, because we do not account for the costs to various other vessels types transiting the HRA. This analysis also points to an interesting aspect in the economic cost of piracy which is that different costs fall on different sectors of the shipping industry. While container ships may accrue excess costs from increasing their speed, tankers and bulk carriers may experience increased costs from re-routing. From discussions with shipping industry experts, we understand that most container ships will not transit at 18 knots through the entire Indian Ocean, especially if they have private armed security on board. They will however speed up to at least 18 knots when they are transiting towards the Northeast of Somalia and through the Gulf of Aden.77 We assume that: When vessels are transiting South/North through the Indian Ocean, they are traveling at an increased speed of 13 knots (up from their ‘economically optimum’ speed of 12 knots). When vessels transit towards the Northeast of Somalia and through the Gulf of Aden, they are traveling20 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy at speeds between 18 and 20 knots. (We have capped our analysis at the lower-bound speed of 18 knots). We assume a typical voyage to be from Oman (port of Muscat) to Yemen (port of Mokha).  estimate 20% of container ships in the HRA do not transit the Indian Ocean at all (they are transiting We East/West between the Gulf/Europe through the Gulf of Aden). Given our earlier estimate that approximately 16,165 container ships transited the HRA in 2011, 20% of container ships is 3,233 vessels. The transits of the remaining 80% (12,932 vessels) is calculated such that for approximately 50% of their voyage (i.e. 1,613nm from Sri Lanka to Pakistan) they travel at around 13 knots; and for the remaining 50% of the voyage (i.e. 1,601nm from Pakistan to Yemen), at 18 knots:Under the specific scenarios and assumptions discussed above, we calculate that the excess cost ofcontainer ships transiting at increased speeds through the HRA was approximately $2.7 billion in 2011.6. The Cost to Labor  seafarers killed 24 1,118 seafarers held hostageMaritime piracy imposes significant costs on seafarers. In 2011, 1,118 seafarers79 were held hostageby Somali pirates, and 24 killed80. In addition, seafarers face increased stress and risk associated withtransiting through pirated waters, with extreme psychological pressures for those unfortunate victimsheld hostage on hijacked vessels.While this report does not attempt to calculate the ‘human cost’ of piracy in terms of seafarer welfare orsuffering, it does assess the associated monetary costs of paying seafarers excess wages to transit piratedwaters81.According to an agreement worked out between the ITF (which represents over 600,000 seafarersthrough affiliated unions), ship owners and companies - seafarers are eligible for double pay when theytransit the HRA: “During the period of transit of the area designated as the IBF [International BargainingForum] High Risk Area seafarers shall be entitled to compensation amounting to 100% of the basic wageand a doubled compensation payable in case of death and disability.”82In addition, the Philippine Government requires that all contracts with Filipino seafarers include aprovision for hazard pay in the form of 200% of wages when transiting the HRA. This applies to a significantportion of shipping labor given that Filipino seafarers account for around 25% of all seafarers83. As ittakes approximately seven days to transit the area and hazard pay is equal to wages of approximately$2,100 per vessel per day85, the cost per vessel is approximately $14,700.If all crews aboard the 42,450 vessels that transit theHRA each year86 received hazard pay, the cumulativecost would be around $624 million. However, not allship owners have signed the agreement. We thereforeassume that crews on 30% of vessels received hazardpay, amounting to around $187.2 million87.Furthermore, the ITF agreement not only impacts transits through the HRA, but also provides for 200%One Earth Future Foundation 21
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy compensation for seafarers held hostage in the region, since the agreement covers “each day of the vessel’s stay” in the HRA. There were 28 vessels hijacked in 2010 that remained in Somali pirate control in all or part of 2011, and 25 more captured in 2011, for a total of 53 vessels carrying 1,118 seafarers. To calculate the 200% pay figure, this report uses the estimate of total wages on the average ship to be $2,100 (as listed above), and an average of 20 seafarers per vessel (derived from the average for all ships held captive in 2011). The length of captivity was calculated using an analysis of all vessels held by pirates in 2011, including total number of days held hostage for each seafarer aboard the hijacked vessels. If all seafarers received 200% pay while in captivity, $39.1 million would have been distributed to seafarer- hostages and their families. However, not all contracts require 200% pay. This report therefore calculates seafarer-hostage compensation only for those seafarers with a hazard pay provision in their contract, namely all Filipino seafarers and the crews aboard vessels subject to the ITF agreement. In 2010, Filipino seafarers accounted for 20% of all hostages held, while 5 of the 53 hijacked vessels were subject to the ITF agreement. For all other vessels, it is assumed that no wages are paid because we were not able to determine on which remaining vessels seafarers continued to receive compensation. Labor costs for seafarers in captivity therefore totaled around $7.9 million in 2011. There is another labor cost associated with Somali piracy that is not included in this report, but is worth noting. This is the ‘replacement’, or ‘opportunity cost’ of the seafarer hostages’ time. In simple terms, if these seafarers had not been taken hostage, they presumably would have continued working and delivering cargo shipments. With them held in captivity, the company is required to contract new employees to complete those deliveries. Further, in many cases seafarers may face psychological trauma, which delays them from returning to work after their hostage experience. Unfortunately we were not able to make a robust quantitative assessment of these cost figures, and our calculations were deemed too speculative to include in this report. Using both the cost of excess salaries for transiting the HRA, and the estimated cost of salaries to seafarers held hostage by Somali pirates, we estimate that the total excess piracy-related labor cost for seafarers in 2011 was approximately $195 million. 7. The Cost of Prosecutions & Imprisonment Total Cost of Prosecutions and Imprisonment, 2011: $16.4 million The rule of law for prosecuting pirates is encapsulated in the UN Convention on the Law of the Sea (UNCLOS), the Convention for the Suppression of Unlawful Acts Against the Safety of Maritime Navigation (SUA), as well as the independent domestic jurisdictions of different states. International law grants states universal jurisdiction to seize suspected pirates. This means that any state, regardless of whether it has a nexus to the piratical act, may prosecute pirates in its domestic courts as long as it has criminalized piracy in its penal code. In practice, the prosecution of Somali pirates is both complicated and contentious. Western countries have generally been reluctant to try and subsequently incarcerate pirates (unless they had a direct connection to the pirate attack) due to concerns about granting asylum to prisoners or legal issues associated with repatriation. Combining this reluctance with Somalia’s low prosecutorial capacity has meant that many regional countries have been engaged by the international community to conduct prosecutions. Kenya, Mauritius, and the Seychelles have all made agreements with multiple countries to accept arrested pirates for trial.8922 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of PiracyOver the past few years, approximately1,089 pirate suspects have been arrestedfor piracy, and have either been tried orare awaiting trial in 20 countries, up from10 countries in 201090. Despite the factthat an increasing number of countriesare accepting suspected pirates for trial,the international community seems tobe approaching a saturation of willpowerand/or capacity to accept further piratesfor trial. According to a report releasedin January 2011 by Jack Lang, the UNSecretary General’s Special Advisor onLegal Issues Relating to Piracy off theCoast of Somalia, “more than 90 per centof pirates captured by States patrollingthe seas will be released without beingprosecuted.” He states that while arounda third of pirates captured between 2008and 2010 were prosecuted, that rate waslower than 10% at the beginning of 201191.In response to this lack of capacity, Langproposed the development of a specializedextraterritorial Somali court system to bebased in Arusha, Tanzania. The cost of thiscourt was estimated to be $2.73 million in2011, and $2.33 million for each followingyear. In addition, Lang estimated that thecost of assistance and funding for courtsand facilities in Somaliland and Puntlandfrom the UN Development Program (UNDP)and the UN Office on Drugs and Crime(UNODC) would be around $24.4 millionover three years92.In addition in October 2011, the UN Security Council called on UN member states to criminalize piracy,and asked that all member states report to the Secretary General on the measures they have taken tocriminalize piracy, by the end of the year93.The length of detention for convicted pirates ranges from anywhere between three years (in Oman) to439 years (in Spain).94 Some countries including Oman and the United States have sentenced pirates tolife imprisonment.95 This year, South Korea sentenced one convicted pirate to death, for the attemptedmurder of the Samho Jewelry’s Captain, Seok Haekyun, whom the convicted pirate shot at pointblankrange.96To estimate the cost of prosecutions in 2011, we calculate both the average cost of pirate trials whichoccurred in 2011, as well as the cost of imprisonment for suspected Somali pirates in the same year, forfour regions: Africa, Asia, Europe and Japan, and North America. The countries are divided into thesefour groupings given their levels of economic development, and prosecutorial costs. Note that the costOne Earth Future Foundation 23
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy of trials and imprisonment in Kenya and the Seychelles is not included, since much of these costs are covered by funding from UNODC Counter Piracy Programme, as well as other international funding mechanisms (covered in Section 8 on the Cost of Counter-Piracy Organizations). To our knowledge, no pirates have completed their detention periods. Therefore, 882 suspects are accounted for in the cost of imprisonment (i.e. 1,089 total suspects less 207 suspects held in Kenya and the Seychelles). From the above rough calculations, we estimate that the cost of piracy prosecutions and imprisonment in 2011 was around $16.43 million. 8. The Cost of Military Operations In 2011, over 30 countries contributed military forces to counter-piracy efforts in the Gulf of Aden and Indian Ocean. The cost of these military efforts must be accounted for in two forms. First is the administrative budgets of the ‘big three’ missions in the region: the European Union Naval Force24 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy(EUNAVFOR) Operation Atalanta, NATO’s Operation Ocean Shield, and Combined Task Force (CTF) 151.Second, the costs of military assets and vessels are borne by each contributing state under the principalthat costs ‘lie where they fall’. Nations contribute to one of the major missions through: Navy vessels (surface combat vessels and auxiliary ships). Maritime patrol/reconnaissance aircraft. Vessel Protection Detachment teams. Military staff assigned to Operational Headquarters or onboard units.109According to the former Operation Commander of EUNAVFOR, Major General Buster Howes, there areanywhere between 10 and 16 vessels deployed on any given day in the Gulf of Aden and Indian Ocean.110In October 2011, a spokesman from NATO said that there were a total of 18 vessels on duty from NATO,EUNAVFOR and CTF 151.111Military efforts have ultimately been successful at disrupting piracy attacks in the Gulf of Aden. However,with the region affected by piracy expanding, military efforts face an exceptionally difficult challenge ofpatrolling over four million square kilometers, an area which is roughly equivalent to one and a half timesthe size of mainland Europe, or ten times the size of Germany.112According to naval authorities, counter-piracy military efforts will likely decline over the next year.EUNAVFOR’s Chief of Staff, Captain Keith Blount has stated that EUNAVFOR will provide no more thaneight vessels in 2012, and NATO between three and four. He also noted the budgetary pressures onmany nations to reduce their defense expenditure.113 Furthermore, Commander Stein Hagalid, BranchHead of the NATO Shipping Centre in Northwood, London, stated that both the EU and NATO militaryefforts were due to expire in December 2012,although it is expected that their mandate willbe extended.114Given the budgetary, resource and capacityconstraints of the existing military efforts in theregion, we may see an increasing number ofvessels contributed by independent deployers,such as China and India, over the next couple ofyears. Alternatively, the world’s largest shippingassociations, (the International Chamber ofShipping, BIMCO, Intercargo, and Intertanko)also urged the UN to consider creating a forceof armed guards to be deployed on merchantships to protect them against piracy attacks.115Calculating the economic cost of military deployments in the region is difficult. Indeed, calculating thecost of any military mission is a contentious issue, and there is an ongoing debate about whether costsshould include total costs of deployment, or just incremental costs. By incremental costs we refer to thespecific, additional costs that accrue from counter-piracy activities, over normal military activities. Sincemilitary personnel, vessels, and equipment are generally already accounted for under national budgets,and presumably would be stationed ‘somewhere’, the argument for assessing costs incrementally isthat only additional costs should be accounted for. Additional costs include factors such as vessels’ fuelconsumption, specific training operations, personnel rotation, basing costs, and specific equipment.One Earth Future Foundation 25
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy In 2011, we attempted to estimate these additional, incremental costs of military deployments. In order to do so, we looked at fuel costs and estimated additional operational costs of contributing vessels. We attempted to track the different military vessels that were tasked with counter-piracy missions over the course of 2011 (according to available information). It is likely that additional vessels were deployed, that we were not able to account for in this analysis. We were not able to calculate the incremental cost of each specific contributing vessel because we lacked precise information about the vessels deployed, or the deployment period. On average, vessels may be deployed for anywhere between two and six months per year. Many vessels may also be tasked with multiple missions, or may be temporarily redirected for other initiatives. This was especially the case in 2011, when we witnessed vessels redeployed for military missions related to the ‘Arab Spring’ and NATO operations off Libya. We were also unable to calculate basing costs for military missions in surrounding countries. Our estimate of the cost of military operations is based on an approximation of the number of vessels deployed on a daily basis. Using the figures above on the average number of vessels deployed for the three major operations, as well as independent deployers, we estimate that on any given day, the vessels deployed might be double the typical composition of the EUNAVFOR forces (that is between five and ten frigates or destroyers, one auxiliary, and three maritime patrol or reconnaissance aircrafts). We then calculate the fuel and other operational costs for those vessels are shown below. (Further details on the data and methodology are included in Appendix 4.)26 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of PiracyIn 2011, we also estimated the cost of unmanned aerial vehicles (UAVs) working on counter-piracy effortsin the Indian Ocean. There are two main types of UAVs: drones and remotely piloted vehicles. To ourknowledge, the major suppliers of UAVs for counter-piracy missions are the US, India and Spain. SinceIndia’s UAVs are deployed for various national security activities in the region, we estimated that only athird of those UAVs were used towards counter-piracy activities. Again, we only included the operationalcost of UAVs in our total cost calculations (and not the unit cost). Appendix 4 provides further detail onthe methodology and assumptions.By adding up the cost of military expenditure on vessels, UAVs, and administrative costs, we estimatethat the total cost of counter-piracy military effortsoff the Horn of Africa, and in the Indian Ocean wereat least $1.27 billion in 2011.9.  The Cost of Counter-Piracy Organizations Total cost of Counter-Piracy Organizations: $21.3 millionIn 2011, we saw a number of new civil society and multilateral initiatives working towards mitigatingSomali piracy and its impact. The major organizations are detailed below: a)  rust Fund to Support Initiatives of States to Counter Piracy off T the Coast of Somalia (‘Trust Fund’)The Trust Fund was launched by United Nations Secretary General BanKi Moon, on January 27, 2010, by a mandate of the 46 member statesmaking up the CGPCS. The objective of the Trust Fund is to: “help defraythe expenses associated with prosecution of suspected pirates, as well asother activities related to implementing the Contact Group’s objectivesregarding combating piracy in all its aspects.” 138 Since its inception, theOne Earth Future Foundation 27
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy Trust Fund has supported 15 projects with a total value of around $7 million.139 In 2010, total donations to the Trust Fund were around $6.9 million, and total spending on projects was $4.2 million.140 By early 2011, the Trust Fund was in dire need of further financing, and was reported to have only $100,000 remaining in its budget. According to the Trust Fund Manager, Tuesday Reitano, the Trust Fund requires an annual stream of $20 million to remain financially sustainable.141 Under Resolution 1976 (April 2011), the UN Security Council urged financial support for the Trust Fund for recommended judicial and detention-related projects.142 Funding was later provided by donors such as the United Kingdom, the European Union and the United Arab Emirates. b) The United Nations Office of Drugs and Crime (UNODC) The Trust Fund works closely with the UNODC Counter Piracy Programme (CPP). The CPP was launched in 2009, with an original mandate of assisting Kenya in managing increasing piracy attacks in the region, and specifically to prosecute Somali pirates according to international standards, rule of law, and human rights.145 That mandate has since expanded, and UNODC is assisting six countries in the region including Somalia, the semi-autonomous region of Puntland, Mauritius, Tanzania, and the Seychelles.146 The UNODC’s CPP focuses on three key areas: Prisons and staff, including refurbishing six prisons in the region to ensure that basic health and welfare is provided to prisoners in line with international human rights standards; and training over 600 prison staff to ensure best practices. UNODC funds were used to develop the Hargeisa prison in Somaliland at a cost of $1.5 million147 and to fund the construction of a courtroom and equipment for the Bossasso prison in Puntland. Support to the police, including developing the capacity of the police forces to effectively gather evidence and prepare case work on piracy-related cases. Support to prosecutions by training Kenyan officials on prisoner transfer agreements or post-trial transfer agreements, the law of the sea, and advocacy and evidential issues.148 c) The Contact Group on Piracy Off the Coast of Somalia (CGPCS) The CGPCS was established under UN Security Council Resolution 1851 in January 2009 to “facilitate the discussion and coordination of actions among states and organizations to suppress piracy off the coast of Somalia.” As of October 2011, the CCPCS had over 66 participants, including member states and international, regional, and nongovernmental organizations.149 The CGPCS now has five Working Groups dedicated to specific issues of piracy deterrence:150 Working Group 1: WG1 is chaired by the United Kingdom, and works on coordinating naval operations in the region, as well as developing the prosecutorial and judicial capacity of regional states. WG1 meets three times per year at the IMO headquarters in London. Working Group 2: WG2 is chaired by Denmark and focuses on legal and judicial issues related to counter-piracy issues. WG2 meets four times per year in Copenhagen.  orking Group 3: WG3 is chaired by the USA and is dedicated to working on best practices and self- W defense against piracy. The group meets twice per year in Washington DC and London.  orking Group 4: WG4 is chaired by Egypt and works on information, messaging, and media efforts W28 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy associated with aspects of piracy. The group met twice in 2011.  orking Group 5: WG5 was established as an additional working group in July 2011. It is dedicated W to tracking and disrupting illicit financial flows associated with the financing of piracy. It is chaired by Italy, and preparatory meetings for the group were held in the U.S., Korea and Italy, in 2011.While many of the initiatives identified by the CGPCS are implemented and funded by the Trust Fund,there is a substantial cost associated with hosting and attending these meetings. At the very least,participating nations and organizations must pay for their travel and accommodation to plenaries andindividual working group meetings. This does not include the opportunity cost of having staff dedicatingtime towards counter-piracy initiatives that might be dedicated elsewhere. d) The Djibouti Code of ConductThe Djibouti Code of Conduct was launched in 2009. It is led bya Project Implementation Unit from the IMO. The Djibouti Codefocuses on developing regional cooperation and coordination todeter piracy in the Western Indian Ocean, Gulf of Aden and Red Sea.The Code has four key ‘pillars’ of work: training, capacity building,rule of law, and information sharing.The Djibouti Code now has 18 national signatories, including: Comoros, Djibouti, Egypt, Eritrea, Ethiopia,Jordan, Kenya, Madagascar, Maldives, Mauritius, Oman, Saudi Arabia, Seychelles, Somalia, Sudan,United Arab Emirates, United Republic of Tanzania, and Yemen. Djibouti Code signatories work towardsensuring their national legislation includes laws that criminalize piracy and armed robbery against ships,and provide for the effective exercise of jurisdiction, investigations, and prosecution of pirate suspects.157In 2010, the Djibouti Code received $13.8 million in funding (primarily from Japan), which was expectedto provide financing until 2013. In 2011, the Djibouti Code received additional funding from the IMO, andbilateral donations. e) The United Nations Development Programme - Somalia158In addition to funds provided by the Trust Fund (accountedfor in the section on the Trust Fund above), the U.K donated$321,000 (£200,000) to UNDP-Somalia to conduct a maritimesecurity needs assessment in Puntland and Galmudug.One of UNDP Somalia’s programs works to strengthennational and local abilities to prevent, reduce, and managethe impact of violence, and to develop improved security andprotection under the rule of law. In 2010, it also contributedto training and equipping police in Somaliland. According tothe UN Secretary General’s Special Advisor on Legal Issues,Jack Lang, the cost of UNDP’s assistance towards prosecutorial capacity in Somaliland and Puntland,including developments in the judiciary and police, the High Judicial Council, Defense Counsel, and basicinfrastructure for the courts, at $2.7 million in 2011. The UNDP received $908,567 from the ContactGroup Trust Fund for these efforts. It is not clear whether the remaining amount was received.161 f) UN Political Office for Somalia (UNPOS)The Contact Group Trust Fund gave $237,300162 to a UNPOS media plan to reopen the Somalia NationalNews Agency, establish a Ministry Training Centre to improve the capacity of staff working with theMinistry of Information, and pay for air time on Radio Mogadishu. These efforts were aimed at increasingOne Earth Future Foundation 29
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Direct Economic Cost of Piracy awareness amongst the general Somali population of the negative effects and long term implications of piracy, preventing youth from participating in piracy acts, and challenging the belief that pirates are to be esteemed because they ‘protect’ the Somali coastline. UNSCR 1976, requests the Secretary General to strengthen UNPOS as the UN’s focal point for counter-piracy.163 UNPOS additionally hosts the ‘Kampala Process’ which is designed to promote internal coordination, information generation and sharing, and coordinate counter-piracy efforts, among the regional authorities in Somalia. g) Save Our Seafarers (SoS)168 SoS was established in March 2011, with a mission of advocating for greater awareness of the human and economic cost of piracy. According to an Intertanko presentation on SoS, the total income of SoS in 2011 was £116,250 ($187,057) in 2011. This funding was received from 16 contributing organizations.166 h) Maritime Piracy Humanitarian Response Programme (MPHRP)167 MPHRP was established in September 2011. The mission of the MPHRP is to: “implement a model for assisting seafarers and their families with the humanitarian aspects of a traumatic incident caused by piracy attack, armed robbery or being taken hostage.”169 MPHRP is funded by the ITF Seafarers Initiative and the TK Foundation. i) Seaman’s Church Institute, Piracy Study The Seamen’s Church Institute is working on a multi-year clinical assessment of the treatment of crew members who have survived piracy attacks. The study is being conducted in conjunction with the Disaster Psychiatry Outreach at the Mount Sinai School of Medicine, and the New York Psychoanalytic Society and Institute.170 According to the Seamen Church Institute’s report on the project, Post Piracy Trauma Assessment and Treatment, the project is estimated to cost $100,000 per year for five years.171 j) PiraT Project The PiraT project is a piracy research initiative conducted in conjunction with various partners in Germany and the European Union. The main goal of this analysis is to develop German “inter-agency governmental options for action that will enable the implementation of non-military measures to strengthen maritime trade security.” The German Federal Ministry of Research and Education has granted just under one million Euros for the project for a total of 33 months, ending in December 2012. k) Oceans Beyond Piracy (OBP) OBP was launched by One Earth Future Foundation in 2010. OBP “seeks to develop a global response to maritime piracy that deals comprehensively with deterrence, suppression, and prosecution of piracy while building the foundation for a longer-term solution”. A key component of the project is establishing public-private partnerships by engaging and mobilizing a wide range of maritime community stakeholders including ship owners, seafarers, governments, international organizations, and the insurance industry. OBP’s budget expenditure was $889,000 in 2011, which included $25,000 towards supporting an IMB initiative to develop reporting on the violence experienced by seafarers during piracy attacks. The Arsenault Family Foundation (AFF, a grant making foundation whose founder also established OEF), made two grants in 2011, one to Radio Daljiir, Somalia ($35,000) and one to a UNODC Messaging Campaign ($100,000).30 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Economic Impact on Regional Nations The Economic Impact on Regional NationsIn addition to the ‘direct costs’ of Somali piracy on industry, government, and civil societystakeholders, piracy also severely impacts regional countries as it disrupts trade patterns,regional security and stability, and demand for leisure activities like tourism. Accurately assessingthe macroeconomic impact of piracy on countries in Eastern Africa and the Indian Ocean is adifficult task for a number of reasons including a lack of robust or transparent data, challengesin disaggregating the economic impact of regional instability from piracy, and the currentpervasive impacts of global economic decline. In conducting analyses on the regional impact ofpiracy, we utilized averages, proxies and hypotheses to increase the accuracy of our estimatesas much as possible. However, in many cases the data was simply not robust enough to makestrong quantitative assertions. In these cases we drew on anecdotal trends and other sourcesof information to discuss some of the potential economic impacts of piracy on countries in theregion. Because these regional indirect costs were speculative, we have not included them in ourtotal cost calculations.The image below shows the expansion of regional countries and trade routes affected by piracybetween 2008 and 2011. For 2011, we focus our attention on the regional impact on twocountries: Kenya (as the most persistently impacted regional country) and India (as one of theemerging countries of concern in 2011).One Earth Future Foundation 31
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Economic Impact on Regional Nations 10. A Regional Case Study: The Impact on Kenya Sharing its northeastern border with Somalia, Kenya perhaps suffers the greatest regional economic impact of Somali piracy. In 2011, piracy negatively impacted maritime trade, tourism, and stability in Kenya, as discussed below. a) Impact on Kenyan Trade Piracy attacks off the coast of Somalia may negatively impact Kenya’s maritime trade through increased insurance premiums charged to ships transiting the region, a reduction of ship traffic as vessels re-route to avoid the HRA, and increased delays in the delivery of goods. These costs lead to economic ‘inefficiencies’ in trade, resulting in a financial impact that may be passed down supply chains to end consumers. Due to data limitations, as well as recent market fluctuations, it is difficult to quantify the precise impact on Kenya’s trade. However, we are able to assess those industries that are most threatened in Kenya. Kenya’s major export items are tea, coffee, and other agricultural goods. Agricultural goods which are exported by sea from Kenya include mangoes, avocadoes, and canned beans. The value of these exports is estimated to be around $120 million per year. The economic impact of piracy on this export trade is felt in a number of ways, one of which is increased transport time. Dr. Stephen Mbithi, Chief Executive of the Fresh Produce Exporters Association of Kenya (FPEAK), indicated in an interview with OBP that it now takes on average, seven more days to transport goods to Europe from Kenya, which translates into increased transportation costs. He added, “We cannot put a number to say precisely by how much, but it [piracy] has certainly reduced the profit margin.” 175 b) Impact on Kenya’s Tourism Industry In September 2011, Somali gunmen entered In September 2011, Somali gunmen entered the Kenyan resort Kiwayu Safari Village, the Kenyan resort Kiwayu Safari Village, and killed British tourist David Tebbutt, and and killed British tourist David Tebbutt, and kidnapped his wife, Judith Tebbutt, who is kidnapped his wife, Judith Tebbutt, who is believed to still be held hostage in Somalia believed to still be held hostage in Somalia (as (as of January 2012). of January 2012).176 In the following month, Marie Dedieu In the following month, Marie Dedieu was was dragged from her home in the Lamu dragged from her home in the Lamu archipelago archipelago in Kenya. Tragically, Ms. Dedieu in Kenya. Tragically, Ms. Dedieu died less than died less than three weeks later in Somalia three weeks later in Somalia after being taken after being taken hostage. It is understood hostage. It is understood that Ms. Dedieu was that Ms. Dedieu was not permitted access to not permitted access to life-saving medication, life-saving medication, upon which she was upon which she was dependent.177 Following dependent. Following the abductions, the the abductions, the Australian, Canadian, Australian, Canadian, French, New Zealand French, New Zealand UK, and US governments UK, and US governments all issued travel all issued travel advisories to tourists to avoid advisories to tourists to avoid the Lamu the Lamu archipelago.178 archipelago. Kenya’s tourism industry is a major source of revenue for the country, accounting for approximately 12% of GDP, or $3.85 billion annually. In 2010, over one million international tourists traveled to Kenya, with the largest proportion visiting from the UK (16%) and the US (10%).179 As with many32 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Economic Impact on Regional Nationsissues assessed in this report, it is especially difficult to quantitatively assess the recent economicimpact of piracy on tourism, given that we can expect that the tourism industry would have beendepressed in any case, due to global economic downturn.Nonetheless, perceived instability and risk associated with piracy off the coasts of Somaliaand Kenya likely reduces the number of tourists opting to travel to Kenya, and especially thosetraveling by cruise ship or to beach resorts. Furthermore, in 2011 the alarming trend of Somalimilitants traveling by sea and kidnapping western tourists from Kenyan beach resorts is likely tohave an even greater impact on the tourism industry. Although these instances would not bestrictly classified as ‘piracy’ (under the definition of acts committed against vessels on the highsea), it is widely believed that this development has emerged as an off-shoot of Somali piracy.Tellingly, the kidnappings occurred during the monsoon season, which normally limits the pirates’activity, so it is possible that pirate clans pursued a ‘softer’ target on land during that time. Thekidnappers have also exhibited similar behavior to pirates, by holding them captive for ransom.This study has utilized analyses on the economic impact of crime and violence in other countriessuch as the U.S. and Caribbean nations, to understand the potential impact of piracy on Kenya’stourism industry. Since the above kidnaping incidents mirror crime and violence on land, usingpast studies on the impact of crime and violence on tourism industry seems apt. A detaileddescription of assumptions, methodology, and data are provided in Appendix 5. In summary, thepotential impacts on the tourism industry in Kenya during 2011 were:180 Between $129 and $795 million lost in tourism revenue, and 3% and 20% of tourism jobs lost. Increased cost of security for businesses (short-term impact). Decreased spending on business development (long-term impact). Even if only 10% of businesses are direct victims of crime, as much as 57% of businesses could face a decline in financing. c) The Humanitarian Impact of PiracyOne of the primary reasons naval operations were initiated off the coast of Somalia was to ensurethe safe passage of World Food Program vessels delivering humanitarian aid to the Horn ofAfrica.181 Four years later, in the midst of the worst famine to plague Somalis in a generation, theneed for food aid is direr than ever. Since Somalia is often considered too precarious for westernaid organizations to open offices in, many aid organizations run Somali-related operations fromNairobi and elsewhere in Kenya.182 Kenya also hosts one of the largest refugee camps in theworld - the Dadaab camp. Dadaab is located approximately 100 kilometers from the Kenya/Somalia border, and houses 440,000 refugees.183 As a result of both severe drought and increasedtargeted conflict, about 1,300 Somali refugees arrived each day at the Dadaab refugee campduring the summer months of 2011.Sadly, a spate of kidnappings of humanitarian aid workers by Somali militants along the Kenya-Somalia border forced one of the largest international NGOs operating in Kenya, Medicins SansFrontiers, to reluctantly withdraw personnel from areas most in need, putting their work on holdduring one of the most severe humanitarian crises in the recent history of the volatile Horn ofAfrica. The potential implications of a vast aid organization evacuation are far-reaching. Removingaid workers from the region, during the worst drought to hit Somalia and the Horn of Africa insixty years, and a subsequent cholera outbreak in the Dadaab refugee camp where nearly half amillion people are currently seeking assistance, risks a significant humanitarian disaster.One Earth Future Foundation 33
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Economic Impact on Regional Nations Aside from the large humanitarian effect of a possible scaling back of aid organizations in Kenya, a secondary effect of an exodus of NGOs from Kenya is a reduction of foreign currency into Kenya. The US Department of State estimates that roughly 15,000 Americans have registered with the US Embassy as residents of Kenya, approximately 70% of which participate in charity work of some sort. Each foreign staff member represents a new source of foreign revenue to the Kenyan economy given that each employee must pay for accommodation, food and clothing, transportation, and leisure activities. For instance, UN employees receive an average housing stipend of $1,888. The annual housing stipend for UN employees in Nairobi, Kenya alone totals $226,501,200. Considering the large percentage of foreign nationals employed by the UN and other western aid organizations, the Kenyan economy could certainly take a noticeable hit from their removal. 11. A Regional Case Study: The Impact on India As piracy attacks have spread further east into the Indian Ocean in recent years, a number of Indian industries and other stakeholders are increasingly impacted by the crime. India is a crucial economic leader in the region. It is the thirteenth largest importer in the world with approximately 90% of its total trade by volume, and 70% by value, transported by sea. Trade accounts for around 51% of its GDP, of which approximately 52% is handled by major ports on the western coast. Furthermore, an estimated $110 billion worth in Indian trade transits through the Gulf of Aden each year , and India imports 75% of its oil supply from the Middle East. d) Impact on Indian Trade Indian trade is impacted by piracy in multiple ways. Indian imports and exports incur additional costs from increased war risk insurance and longer transit times. Potentially, the long-term impact on India could also involve changes in trading partners - a pattern we are already beginning to witness. In 2010, India’s total exports and imports were valued at $220 billion and $269 billion, respectively.192 If 70% of that trade is seaborne, and 52% of seaborne trade transits via India’s west coast, then approximately $178 billion in Indian trade transits through the Indian Ocean.193 Based on these calculations as well as information on India’s major trading partners and commodities; the seaborne trade, major commodities and major stakeholders at risk in India are as follows: $178 billion worth of seaborne trade transiting through the Indian Ocean Major commodities at risk: petroleum and petroleum products; precious stones (such as gold, gems, and jewelry); machinery and instruments; coal, and briquettes19634 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Economic Impact on Regional Nations Major trading stakeholders: UAE, USA, Saudi Arabia, and the NetherlandsAny impact on India’s international trade will also bear a secondary macroeconomic impact onthe price of goods. For example, there is evidence that coal imports into India from South Africahave incurred increased costs due to longer transit times and higher insurance premiums in theregion.197 India imports 30% (18.3 million tons) of its coal from South Africa, the value of whichwas around $1.75 billion in 2010.198 The increasing risk of piracy in the transit zone betweenIndia and South Africa, as well as the associated increase in import costs has meant that manyIndian coal importers have canceled their imports from South Africa. For instance, the IndianAdani Trading Company, which imports about 70% of India’s coal imports, cancelled 600,000tons of South African coal imports.199 The Chief Executive of the company stated, “Of course weare concerned about Somali pirates. It’s a potential loss of $130 a tonne.” Given that India’s coalimports are expected to increase by 70% between 2011 and 2012, this potential loss may havea significant economic impact.200Further, since coal is used in the production of steel, we might also expect to see a knock-on effecton the price of steel. However, given the volatility of commodity prices in general, especially inrecent years, it is difficult to assess the precise economic impact on specific commodities. Thatis, while it is usually possible to compare the price of steel (and other commodities) in 2011with prices in previous yearsto analyze potential economicimpacts related to piracy, therise in the value of commoditiesin early 2011 associated witheconomic recovery makesisolating any effect of piracydifficult.201 Nonetheless,some rough estimations of theeconomic impact on the steel industry can be made. Since the added cost to South Africa isestimated to be around $2 per ton, the extra cost could be as high as $36.6 million. Under a‘worst case scenario’, a larger cost could arise if the entire trade of coal from South Africa to Indiawere to cease. The estimated cost in such a case is estimated to be approximately $1 billion.This scenario is not impossible, with some major Indian importers of South African coal alreadystating, “we’ve not done any fresh South African deals for one to two months, and I don’t thinkother people have either.” 202One Earth Future Foundation 35
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Emerging Trends Emerging Trends 12. Increasing Seafarer Deaths While multi-billion dollar investments into ship hardening, armed security, and naval forces have helped mitigate the number of successful hijackings, tragically the number of seafarers killed as a result of piracy, continues to grow. The number of seafarer deaths has tripled from 8 in 2009 to 24 in 2011.203 In February 2011, the public eye turned to the tragic deaths of four sailors aboard the private yacht Quest, who were killed by pirates when U.S. naval forces approached. This increasing rate of fatality is a concerning development, which suggests that pirates may be growing more desperate and willing to use force against hostages in order to hijack vessels or force the payment of ransoms. Seafarers face severe physical and psychological trauma both during an initial attack, and throughout the length of their captivity. In fact, the greatest number of deaths occurred while seafarers were held hostage, as a result of malnutrition or disease, and even suicide. This is of serious concern, given that the duration of hostage situations continues to grow, and seafarers now face an average of more than six months in captivity. Many vessels are held for longer periods. At the end of 2011, three vessels hijacked in 2010 carrying 64204 seafarers have been held captive for over a year: the Iceberg I (642 days as of December 31, 2011), the Albedo (400 days), and the Orna (376 days). It is crucial to recognize that piracy continues to impose a severe cost on its victims, namely the innocent people attacked and held hostage. This cost, though impossible to quantify, far exceeds the financial expenditures outlined throughout this report. While $7 billion may be spent each36 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Emerging Trendsyear, this has not eliminated the risk of physical harm and deaths caused by piracy. Further,hundreds of desperate Somali pirates are believed to die every year as a result of pirate activity.13. Increasing Risk of Piracy in West AfricaPiracy off the west coast of Africa became an increasing concern over the course of 2011.According to the IMB Annual Report, a total of eight hijackings, ten vessel boardings, and twoother piracy attacks were reported near Benin in 2011, compared with no incidents in 2010. Inaddition, two vessels were successfully hijacked directly off Nigeria in 2011, and there were atleast three attempted attacks and five boardings. In 2010, 14 vessels were boarded and six moreattempted off the coast of Nigeria.205 In August 2011, the region was listed as a war risk zone forshipping by Lloyd’s Joint War Committee.206 Importantly, it is also understood that piracy off thewest coast of Africa is severely underreported. According to John Drake, a senior risk consultantwith security firm AKE, “In Nigeria it is estimated that approximately 60 percent of pirate attacksgo unreported.”207The economic impact of piracy on regional economic leaders such as Nigeria could be significant.Nigeria is one of the largest crude oil producers in the world, and is the largest exporter inAfrica; approximately 95% of Nigeria’s exports are petroleum and petroleum-based products. In2010, Nigeria exported about $70 billion worth of petroleum products. Nigeria’s major tradingpartners are the USA, India, Brazil, and Spain.208 In addition to Nigeria, almost all the major oilexporters of Africa (including Angola, Gabon, Ghana, Equatorial Guinea, and the DemocraticRepublic of the Congo) are located in Western Africa.209Therefore, although the focus of this report is on the economic cost of Somali piracy, developmentsoff the west coast of Africa (including their economic impact) are important to track and assess.We encourage further studies in this area, especially should West African piracy continue toincrease.14. Increasing Impact of Piracy on Oil TradeOver the course of 2011, emerging trends in the Somali piracy business model ushered greaterconcern about its potential impact on oil trade. This concern stems from two importantdevelopments. First, we witnessed increasing attacks on oil tankers. Pirates appear to considertankers a particularly lucrative target given the record breaking ransoms paid to release themin recent years. For instance in December 2010, the Samho Dream fetched $9.5 million for itsrelease - a record at the time. In February 2011, two oil tankers were hijacked by Somali piratesover the course of two days. One of those tankers, the Irene SL, received the highest ransom paidon record, at $13.5 million. The Irene was carrying the equivalent of approximately 20% of oneday’s worth of the U.S.’s crude imports.Second, pirate attacks in 2011 increasingly moved northeast towards the Gulf and Middle East,where oil trade is heavily concentrated. According to the U.S. Energy Information Administration,the Hormuz Strait and the Gulf of Oman carry around a third of all seaborne traded oil, andapproximately 17% of all globally traded oil with approximately 17 million barrels of oil and 13oil tankers passing through the Strait every day.210 In addition, Gulf Cooperation Council (GCC)countries are expected to provide a quarter of the world demand for oil in coming years, furtherhighlighting the severe impact piracy could have on the world’s energy supply in the future.211One Earth Future Foundation 37
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Emerging Trends In a survey conducted for a Gulf Petro-Chemical and Chemical Association (GPCA) conference in Abu Dhabi in November 2011, over 83% of participants stated that piracy was a significant concern to their organizations, resulting in increased costs and greater environmental and crew risks. In the same survey, 20% of members stated they had been direct victims of attacks and 53% believed the problem was likely to escalate in the future in the absence of greater intervention. Dr. Al-Sadoun, Secretary General of GPCA, stated, “chemical and oil vessels were considered among the easiest targets for pirates as they sail from the Gulf and Red Sea, fully laden with cargo, rendering them slow and often lower to the sea’s edge making it more accessible.” He also claimed that “piracy activities, if left undeterred, have the potential to interrupt, not only MENA [Middle East and North Africa] but also Asian-European trade routes as well. This is not only a GCC and Gulf issue, it’s a global issue.” 21238 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Total Cost of Somali Piracy The Total Cost of Somali Piracy Total cost of Somali Piracy 2011: $7 billionThis study has calculated the economic impact of Somali piracy in 2011. It has addressed thedirect economic cost of nine different economic cost factors: ransoms, insurance, security guardsand equipment, re-routing, increased speed, labor, prosecutions and imprisonment, militaryoperations, and counter piracy organizations. The total cost of these nine impacts is estimatedto be between $6.6 and $6.9 billion.In our previous report on the Economic Cost of Piracy in 2010, we estimated that the cost ofpiracy in that year was $7 - $12 billion. It is important to note that the new cost estimate of $6.6 -$6.9 billion does not necessarily suggest that the impact of piracy declined in 2011. The differentestimations are related in part to improved information availability, as well as changes in themethodology used to calculate the overall cost: Our initial 2010 report produced a vast amount of dialogue and opened new doors to collaboration on calculating the cost of piracy. This project is the product of much cooperation and discussion with stakeholders from all sectors, which has allowed us to fine-tune the accuracy of the study. OEF encourages continued feedback and discussion about the 2011 report, as per the 2010 report. This report has only calculated the direct costs of piracy, since it was not possible to accurately quantify the indirect costs of piracy. Although the study discusses the potential impact on regional countries, these costs, are not included in the total cost of piracy.  lower total cost numbers also reflect evolving trends in piracy. For instance, in 2010 it was The predicted that some ships might opt to re-route their voyages around the Cape of Good Hope to avoid the HRA. Due to the availability of better data on ship re-routing, in 2011 we have only assessed the cost of ships re-routing by hugging the Indian coastline, and transiting to the east of the HRA. This model of re-routing is less extreme and costly. There has also been an increase in defensive tactics against piracy, especially the use of private armed security. These tactics have often meant that ships have not engaged in other costly activities, such as re-routing.Of the total costs of $7 billion in 2011, over 80% were borne by the shipping industry, 19% bygovernment, and less than 1% by civil society. Further, two of the total costs (counter-piracyorganizations and prosecutions) could be considered developments in long-term solutionsto piracy. These two factors, at $37 million, account for about 1% of the total costs of piracy.One Earth Future Foundation 39
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 The Total Cost of Somali Piracy The remaining 99% ($6.8 billion) of these costs were devoted to mitigating the symptoms of piracy, and defending against pirate attack. Without adequate investments in long-term, sustainable solutions to the piracy problem in Somalia, the cost of mitigating the symptoms of piracy are likely to be a perpetual expense for the shipping industry, and governments. From a cost- benefit perspective, this highlights a concerning dimension of the cost of piracy: as funds are consistently spent by industry to treat the symptoms of piracy, very little is invested in resolving the root causes. While the costs of piracy persist, we are faced with an increasingly risky piracy model, inflicting more deaths and violence against seafarers, expanding its geographical reach, and threatening oil trade. Substantially reducing the economic and human cost of piracy will require a redirection of investments from short-term symptoms to long-term solutions.21340 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Appendix One: Methodology for Calculating Piracy Insurance Premiums Appendix One: Methodology for Calculating Piracy Insurance Premiums To calculate the different war risk premiums paid by ships, we estimated the different proportions of ships which might be purchasing war risk premiums at different rates, as shown below: The war risk premiums for each type ship is then calculated as follows: SUM= {(0.0002*HVST)*(0.125* STPI)}+{(0.0003* HVST)*(0.375* STPI)}+{(0.0004*HVST)*(0.125* STPI)}+{(0.0005* HVST)*(0.375* STPI)} Where: HVST: Hull Value, Ship Type STPI: Ship Type, Proportion in Indian OceanOne Earth Future Foundation 41
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Appendix Two: Methodology for Calculating the Cost of Re-Routing Appendix Two: Methodology for Calculating the Cost of Re-Routing As indicated in Section 4 on the costs of re-routing vessels, we utilized many of the assumptions and format of BIMCO’s re-routing calculator to estimate the aggregate cost of re-routing. A summary of the information fed into the BIMCO calculator is shown below. It is important to note that one of the most important assumptions in these calculations is the proportion (percentage) of ships which do indeed re-route to avoid high risk areas. We have estimated that approximately 30% of vessels are not relevant for re-routing, because they only transit East/West from Middle East/Africa/Europe, and therefore do not transit the Indian Ocean. This estimate is based on trade patterns in the region, as well as available AIS data. Therefore, the maximum (upper bound) proportion of ships re-routing is 70%. Since some vessels may not re-route, we have also created a lower bound estimate of 50%. Note that stakeholders interested in the total cost of re-routing can change this percentage figure in the below table, to match different assumptions. The total cost is then divided by two for both the lower bound and upper bound estimations, since the BIMCO calculator assesses costs for a round-trip voyage, and our interest lies in a one-way voyage. The charter hire and hull value costs used in the model are taken from the United Nations Conference on Trade and Development, Review of Maritime Transport, and are summarized below:214 Our alterations on the BIMCO calculator are shown below:42 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Appendix Three: Methodology for Calculating the Increased Cost of Increased Speed Appendix Three: Methodology for Calculating the Cost of Increased Speed The calculations of excess bunker costs for ships transiting at faster speeds are shown below. Note that the total cost was divided in half to assess a one-way transit, rather than a round-trip voyage. The economical and full capacity speeds for different ship types is shown below: In order to more precisely understand how vessels change their speeds in the HRA, we gathered the speed and geo-location of all vessels broadcasting their AIS signal on January, 27, 2012. Using data graciously provided by exactEarth, we have divided the Indian Ocean into three different zones, which is detailed in the table below. Vessels transiting Zones outside of the HRA travel at much slower speeds than those within the HRA. As there is no clear alternative explanation for this consistent increase in speed across these Zones, this suggests that the vessels are in fact increasing their speed in the HRA to avoid attack.One Earth Future Foundation 43
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Appendix Three: Methodology for Calculating the Increased Cost of Increased Speed We assume that in the absence of piracy, container ships would transit at the economical speed of 12 knots, and increase their speed up to 18 knots in response to piracy. The data suggests that in Zones 1 and 3, vessels are transiting at a speed of 16.26 and 13 knots, respectively. While this could certainly be the ‘actual average’ cruising speed of the vessels, it could also be attributed to the fact that the data assesses ‘tankers’ and ‘cargo’ ships. Therefore, multiple types of cargo ship are encompassed under ‘cargo’ ships, including ships that transit at slower rates than container ships. This also explains the significant variation (standard deviation of more than 3 knots) of speeds for ships classified as ‘cargo’.44 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Appendix Four: Methodology for Calculating the Cost of Military Operations Appendix Four: Methodology for Calculating the Cost of Military Operations The assumptions and methodology used to calculate the cost of counter-piracy military vessels are shown below: 1.  Fuel Cost: $3.61 per gallon; calculated using the pre-tax average diesel price from January-October 2011 from Belgium, France, Germany, Italy, Netherlands, UK, and USA.220 2. Methodology for adjusted daily fuel consumption: a. Calculation of daily fuel consumption: i. Divide the listed range by the listed fuel capacity (in some cases converted from tons to liters) to calculate the ‘gas mileage’ for each craft. ii. Divide the ‘gas mileage’ by the listed cruising speed to calculate ‘gallons burned per hour’. iii. Multiply ‘gallons burned per hour’ by 24 to get daily fuel consumption. b. Adjustment: as per discussions with a navy representative, ships are assumed to be operating 25 days per month; and aircraft fly 5 hours per day. c. Model ships used for classification: Frigate: Oliver Hazard Perry Class (U.S.); Destroyer: Arleigh Burke Class (U.S.); Auxiliary: average of Quinghaihu Supply Ship (China), INS Sukanya Patrol Ship (India), and Galicia Class Amphibious Ship (Spain); Aircraft: P-3C Orion (multiple countries). The assumptions and methodology used to calculate the cost of UAVs are shown below: 1. Hourly Cost: a. Searcher II: Use that of the Hermes 450 because it is a single craft, as opposed to a ‘system,’ like the Reaper. b. Heron: Use that of the Hermes 450 because it is a single craft, as opposed to a ‘system,’ like the Reaper. c. Scan Eagle: use half the cost of the Hermes 450 because the Scan Eagle is not piloted. 2.  Missions per day: as per discussions with a navy representative, assume that half the fleet are in the air each day, the other half at base, or stationed on military vessels. Daily mission duration: assume if endurance is greater than 24 hours, then the aircraft is in the air all day; the 3.  Searcher II’s endurance is 18 hours, so we have assumed a mission time of 14 hours, figuring that a four hour cushion was a conservative estimate. 4. U. S. ‘other costs’: $3.1 million for 4 months. The cost is annualized to $9.3 million.One Earth Future Foundation 45
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Appendix Five: Methodology for Calculating the Impact on Kenya’s Tourism Industry Appendix Five: Methodology for Calculating the Impact on Kenya’s Tourism Industry According to World Bank country information, tourism accounts for 12% of GDP in Kenya. Since Kenya’s GDP in 2010 in current US dollars was $32.092 billion, approximately $3.85 billion is attributable to the tourism industry. There were a total of 1,095,945 international tourist arrivals to Kenya in 2010.222 Therefore, average tourist revenue per tourist is approximately $3,513 ($3.85 billion ÷ 1,095,945). Tourists from the UK account for 16% (the highest share) of international tourist arrivals in Kenya. France accounts for 4.8% of all international tourist arrivals. This analysis looks at the potential impact on tourists from the UK and France, given the public attention devoted to kidnappings of citizens from both countries. I 1993, Florida was regarded as the leading crime state in the USA. As a response to increase crime in the state, n 89% of Britons and 93% of Germans decided not to visit Florida. Similarly, Miami saw a 24% decline in tourists from the UK, and a 21% decline from Germany. As such, we can hypothesize that anywhere between 25% and 90% of tourists from France and the UK may have decided not to visit Kenya. Total tourists from the UK and France = 147,548 Total tourists from the USA and other European countries = 375,452223  25% decline in tourists from the UK and France = 36,887 fewer tourists. 36,887*$3,513 = $129 million revenue A loss. 25% decline in tourists from the USA and other European countries = 93,863 fewer tourists. 93,863*$3,513 = $329 million revenue loss. 90% decline in tourists from UK and France = 132,793. 132,793*$3513= $466 million There are two different statistical databases that can be used to calculate the associated job base. Both databases generate the same conclusion: Source 1 (UNCTAD): In 2008, approximately 483,000 jobs were in the Kenyan tourism industry. Source 2 (World Bank): In 2010, approximately 11% of the Kenyan labor force was employed in tourism. Based on the total employed population, this equates to 1,181,400 jobs. Calculation based on Source 1: $3.85 billion in revenue is associated with 483,000 jobs. A $129 million decline therefore might see a reduction in approximately 16,184 jobs. As a percentage of total tourism jobs (483,000), this is 3.3% decrease, based on the lower bound economic estimate. Using the upper bound estimate of a $795 million impact, the loss of jobs may be as high as 99,736 jobs, or 21% of total jobs.46 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 References References1 International Maritime Bureau, Piracy and Armed Robbery Against Ships, Annual Report, 2011.2 Data compiled by the authors, from International Maritime Bureau, Piracy Reporting Center, Annual Reports 2008-2011.3 Pie graph data compiled from International Maritime Bureau, Annual Piracy Report, 20114 Data compiled from IMB, Piracy Reporting Center, Annual Reports, 2008, 2009, 2010, 2011.5 Success rates calculated from IMB Piracy Reporting Center, Annual Reports, 2010 and 2011.6 I mage of the Irene SL sourced from Trade Winds. Available at: SL_300_122682a.jpg.7 “  Somali Pirates Free Greek Oil Tanker”, Financial Mirror, April 9, 2011, Available from: Cyprus_and_World_News/23115.8 “  Somali Pirates Receive Record Ransom for Ships’ Release”, BBC News, November 6, 2010. Available from: news/world-africa-11704306.9 “  Monthly Piracy Update”, EUNAVFOR, October 25, 2011. Available from:; BNO News, “Pirates Kill Crew Member after Hijacking French Yacht”, WireUpdate, September 10, 2011. Available from: http://wireupdate. com/wires/20013/pirates-kill-crew-member-after-hijacking-french-yacht/; “MV Iceberg Remains in Pirate Control Despite Reports of Release”, The Maritime Executive, October 26, 2011. Available from: remains-in-pirate-control-despite-reports-of-release; Zain, Asma Ali, “Pirates Release Ship, Crew after 19 Months,” Khaleej Times, October 24, 2011. Available from: xml&section=theuae; “Somali Pirates Release 6 Indians”, Indian Express, October 30, 2011. Available from: http://www.; “Pirates Paid - So Where is MV Iceberg?”, 7 Days, November 10, 2011. Available from: G  eneral Insurance Research Organising Committee (GIRO), The Actuarial Profession: Sanders, David et al, Marine Piracy 34, October 4, 2010.11 B  andel, Carolyn & Crowley, Kevin, “Somali Pirate Attacks Sink Premiums as Insurers Leap Aboard”, Bloomberg, August 2, 2010. Available from: leap-aboard.html; Chalk, Peter, “An Old Scourge Needs a Modern Solution”, New York Times, September 3, 2010; Milmo, Cahal, “Insurance Firms Plan Private Navy to Take on Somali Pirates”, The Independent, September 28, 2010.12 R  ansoms data compiled by author from: International Maritime Bureau Piracy Reporting Center (IMB PRC), Quarterly Reports, 2011; “Monthly Piracy Updates”, EUNAVFOR, Available from:; Pierce, Andy, “Ransom Breached”, TradeWinds, April 21, 2011. Available from:; Ahmed, Mohamed, “Somalia Pirates Release Panama-flagged Bitumen Cargo Ship”, Reuters, April 15, 2011. Available from: article/2011/04/15/idINIndia-56367620110415; Olser, David, “Pirates Refuse to Free South Korean Seafarers Unless Jailed Comrades are Released”, Lloyds List, July 15, 2011. Available from: ece; Mwangura, Andrew, “MV Blida Released, Heading to Mombasa”, SomaliaReport, November 3, 2011. Available from: http://; “Piracy on the Rise”, National Post News, July 14, 2011. Available from: http://; Mwangura, Andrew, “Pirates Release MV Eagle after Ransom Paid”, SomaliaReport, September 29, 2011. Available from:; Mwangura, Andrew, “MV Eagle Heading to Safe Waters”, SomaliaReport, April 23, 2011. Available from: php/post/595/MV_Eagle_Heading_to_Safe_Waters; “Update: 3 Somali Pirates Hijack Indian Ship with 21 crew off Oman”, Reuters, August 20, 2011. Available from:; Associated Press, “Somali Pirates Release Tanker but Four Take Hostage”, Herald Sun, December 1, 2011. Available from: e6frf7lf-1226211485935; Mwangura, Andrew and Mohamed Beerdhige, “MT Gemini Nears Kenya, 4 S. Korean Still Captive”, SomaliaReport, December 2, 2011. Available from:; “Kenyan Sailors Welcomed after Somali Pirate Release”, BBC News Africa, February 15, 2011. Available from: news/world-africa-12463951; “Somali Pirates Free Tunisian Ship ‘for $2 million’”, AFP, March 17, 2011. Available from: 11b211b57be1ac04db72.1d1; “Vietnamese Sailors are Home After Ransom Paid to Pirates”, Voice of America, September 26, 2011. Available from:;One Earth Future Foundation 47
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 References “Somali Pirates Hijack Greek-owned Chemical Tanker”, Reuters, November 1, 2011. Available from: http://news.nationalpost. com/2011/11/01/somali-pirates-hijack-greek-owned-chemical-tanker/; Olser, David, “Greek Chemtanker Hijacked by Somali Pirates”, Lloyd’s List, November 1, 2011. Available from:; “Somali Pirates Free MV Panama after $7 million Ransom Paid”, Reuters, September 6, 2011. Available from:; “Somali Pirates Free Hijacked Greek Oil Tanker”, Reuters, August 26, 2011. Available from:; Narayan, V. & Hafeez, Mateen “Navy Hunts for Two More Pirates Ships”, Times of India, February 8, 2011. Available from: prantalay-14; “Prantalay Pirates Remanded in Seven-day Judicial Custody”, The Hindu, February 8, 2011. Available from: http://; Malik, Veeresh, “The ‘RAK Afrikana’ Inside Story: Here’s How the Crew was Released”, Moneylife, December 6, 2011. Available from:; Mwangura, Andrew, “MV Renuar Freed”, SomaliaReport, April 26, 2011. Available from: php/post/609/MV_Renuar_Freed; Kirk, Donald, “South Korea Delivers Setback to Somali Pirates, and a Warning to North Korea”, Christian Science Monitor, January 21, 2011. Available from: South-Korea-delivers-setback-to-Somali-pirates-and-a-warning-to-North-Korea; Hsiu-Chuan, Shih, “Taiwanese Fishing Boat Escapes from Pirates: Ministry”, Taipei Times January 30, 2011,. Available from: archives/2011/01/30/2003494768; Ecoterra, “Two Spaniards Free from Somalia Against Massive Ransom”,, May 15, 2011. Available from: from-somalia-against-massive-ransom-&catid=36:news&Itemid=74; “Pirates Say They’ve Freed Spaniards after Ransom Paid”, Reuters, May 14, 2011. Available from:; “Somali Pirates Fire at and Hijack Oil Tanker off East Africa”, AP, March 29, 2011. Available from: article/ALeqM5hlUboTuD6D_BE1PMsDSqr_z-Rckw?docId=6385957; Mwangura, Andrew, “MV Hoang Son Sun Released for $4.5M Ransom”, SomaliaReport, September 16, 2011. Available from:; The ransom price for the Motivator was not available, and was tabulated as the average ransom payment for 2011.13 This figure was also supported by EUNAVFOR’s estimate that around $135 million in ransoms was paid up to early December 2011.The same assessment also pitched the average ransom at $4.6 million in 2011. See Sofia News Agency, “Somali Pirates Strike It EvenRicher in 2011”,, December 7, 2011, Available from: JD, “Second Indian Hostage Dies in Custody,” SomaliaReport, December 28, 2011. Available from: Pierce, Andy, “Ransom Breached”, TradeWinds, April 21, 2011. Available from:; Ahmed, Mohamed, “Somalia Pirates Release Panama-flagged Bitumen Cargo Ship”, April 15, 2011. Available from:; Olser, David, “Pirates Refuse to Free South Korean SeafarersUnless Jailed Comrades are Released”, Lloyds List, July 15, 2011. Available from: “Monthly Piracy Updates”, EUNAVFOR. Available from: Apps, Peter, “Factbox - Global Kidnap Hotspots and Ransom Costs”, Reuters, February 17, 2011. Available from: “Somalia: Three Britons Pardoned by President”, BBC News Africa, June 26, 2011. Available from:; “Brits Arrested in Somalia with ‘£2.2 million Ransom for Pirates’”, The Telegraph, May 26, 2011. Availablefrom: “Somali Pirates ‘Free Arms Ship’”, BBC News, February 5, 2009. Available from:; Bandel, Carolyn & Crowley, Kevin, “Somali Pirate Attacks Sink Premiums as Insurers Leap Aboard”; Bloomberg, August 2, 2010.Available from:; “Danger at Sea”, Aon One, March 31, 2010. Available from:; Sanders, David et al.,Marine Piracy, presented at the General Insurance Research Organizing Committee (GIRO) Conference and Exhibition, October 12-15,2010. Available from:; Percy, Sarah & Shortland,Anja, The Business of Piracy in Somalia, DIW Berlin Discussion Papers, 1033. Available from: In some instances, if a ship is held for an elongated period of time, it may be classified under ‘total loss’ by marine insurers.21 According to a study conducted by the Catlin Group, additional costs to release a ship could amount to around 50% of the ransom48 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Referencesprice. That is, ship owners might pay around $2.5 million in excess costs for a $5 million ransom. Catlin Group Limited, Piracy 2011:A Growing Menace, September 2011. Available from: Other major forms of marine insurance include hull and cargo.23 For further details on the Joint War Committee see: See also Baldwin, Derek, “Piracy Wave Set to Hit Households in the GCC”, Gulf News, August 28, 2011. Available from: The risk zone is encircled by the following boundaries: on the northwest to the Red Sea South of Latitude 15°N;on the West of the Gulf of Oman by Longitude 58°E; on the East by Longitude 78°E; and on the South by Latitude12°S. See Marsh Inc., Piracy - The Insurance Implications 2011, Available from: According to Marsh, the major war risk insurers are: Lloyd’s, Liberty, O’Farrell, Watkins, XL, and GAREX. Ship owners with closeflag, ownership or management ties to certain countries are also able to secure competitive policies from those countries. The majornational providers include: Hellenic War Risks Association (Greece), Den Norske Krigsforsikring for Skib (Norway), the Japanese WarPool (Japan), the Arab War Risks Insurance Sydnicate (Arab States in Arabian Gulf) and the Combined Group of War Risks Associations(United Kingdom). See Marsh Inc., Piracy - The Insurance Implications 2011, Available from: Aon Risk Solutions, 2009-2011 Piracy Update, September 2011.27 Marsh Inc., Piracy – The Insurance Implications, July 2011. Available from: Although it does appear that marine K&R policies are increasingly being extended to pay for the release of propertyas well as personnel, since Somali pirates usually make a single ransom demand to release the vessel, cargo, andcrew. See Marsh Inc., Piracy – The Insurance Implications, July 2011. Available from: Marsh Inc., Piracy – The Insurance Implications, July 2011. Available from:;” Aon Risk Solutions, 2009-2011 Piracy Update, September 2011.30 Marsh states it has achieved reductions of 50% for typically quoted war risks premiums for ships which are separately coveredfor K&R with an appropriate limit (at least $5m), and with a waiver of rights of subrogation from the K&R insurer given to warrisks underwriters. See: Marsh Inc. Piracy - The Insurance Implications, July 2011. Available from: Similarly, an article in Lloyd’s List stated that war risk underwriters mayoffer discounts as high as 50-60% on insurance premiums for companies purchasing K&R insurance. See McMahon, Liz, “Increasein Private Security Companies Causes Diversification in K&R Market,” Lloyd’s List, December 13, 2011. Available from: Marsh Inc., Piracy – The Insurance Implications, July 2011. Available from: Major K&R insurers include (but not limited to): Hiscox (Lloyd’s syndicate), Aspen, Catlin, Chartis, CV Starr, Griffin, and Travelers.Aon Risk Solutions, 2009 - 2011 Piracy Update, September 2011. Available from: See for instance, the case of the Asphalt Venture, described in the ransoms section above.34 Note that Andrew Bardot, Executive Officer of the International Group of P&I Clubs, has asserted that in cases where the crew wastaken ashore, and a separate ransom demand made for their release, P&I Clubs may also become involved. See McMahon, Liz, “PirateFocus on Crews Will Force P&I Clubs to Pay Ransoms”, Lloyd’s List, October 14, 2011. Available from: According to Joseph Plumeri, Willis’ Chairman and Chief Executive Officer. See Lowe, Mark, “Fast Growing Business”, MarsecReview, April 2, 2011. Available from: In a separate study ofGerman ship owners by PricewaterhouseCoopers, 60% of participants said they pay more for insurance cover, than before piracyincreased. See Smith, Neville, “More Bad News on Piracy”, Safety4Sea, August 17, 2011. Available from: See Mulrenan, Jim, “Piracy Cover Losing its Allure”, Tradewinds, September 16, 2011, Vol 22(37), 27.37 Bockmann, Michelle Wiese, “Lloyd’s of London Reviewing Assertion Ship Ransoms May Fund Terror Group”, Bloomberg, June17, 2011. Available from: According to Lloyd’s 2010 Annual Report, gross written premium for Lloyd’s total marine sector in 2010was £1.671 billion ($2.6 billion), a slight increase from £1.606 billion in 2009. In 2010, seven percent of Lloyd’s total earnings were inOne Earth Future Foundation 49
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Referencesthe marine market. The report notes that an increase in the perceived profitability of marine underwriting has created an increasinglycompetitive marketplace. See Lloyd’s, Lloyd’s Annual Report, 2010. Available from: Reductions of between 25%-35% are available for ships carrying private armed security.39 According to Sean Wollerson of Jardine Lloyd Thompson, the number of ships now subject to excess insurance premiums hasincreased from 22,000 to 28,000. Given that ~18,000 ships transited the Suez Canal alone in 2010, we believe this figure to bean underestimation. See MacAskill, Andrew & Sundaram, Karthikeyan, “India Fights Lloyd’s Expanding Piracy Zone After 300-FoldInsurance Jump”, Bloomberg, June 2, 2011. Available from: Calculated from the following estimated figures: (January: 1,800, February: 1,800, March: 2,500, April: 2,750, May: 3,250, June:3,300, July: 3,550, August: 3,700). Therefore totaling 22,650 for eight months, an average of 2,830 per month. See Blount, Keith,Combating Piracy: Current Situation and Trends, EUNAVFOR Presentation at the Hanson Wade Combating Piracy Conference, October18, 2011. Available from: Blount, Keith. “Combating Piracy: Current Situation and Trends.” October 18, 2011. Available from: This figure is also supported by traffic rates in the Suez Canal. According to the Suez Canal Authority, the average daily traffic inDecember 2011 was 50.8 vessels, which equates to around 18,288 vessels per year. Since this only accounts for the Suez Canal, it isreasonable to assume that traffic in the wider Indian Ocean, and high risk area is at least double that figure. Furthermore, on a typicalday more than 4,500 ships are in the Indian Ocean region that broadcast their positions via AIS according to Satellite AIS data suppliedby exactEarth. The same Satellite AIS data indicate that approximately half the vessels are cargo ships and one-quarter of the vesselsare tankers.43 Data available from: Sean Wollerson, Jardine Lloyd Thompson as well as Andrew Voke of Lloyds Market Association have estimated that piracy-relatedinsurance premiums are around 0.1% of hull value. Another anonymous broker from a leading insurance firm estimated that thepremiums are between 0.125% and 0.2% See MacAskill, Andrew & Karthikeyan Sundaram, “India Fights Lloyd’s Expanding Piracy ZoneAfter 300-Fold Insurance Jump”, Bloomberg, June 2, 2011, available from:; Mulrenan, Jim, “Piracy Cover Losing its Allure”, Tradewinds, 16September 2011, Vol 22(37), 27; Jones, Aidan, “Somali Piracy a Boost for London’s Shipping Insurers”, Christian Science Monitor, May31, 2009, Available from: Hull value is for average value of ships approximately five years old. For tankers, price averaged for Handy 45,000 DWT (at $26million) and Suezmax 150,000 DWT (at $62 million). We do not include VLCC Tankers (300,000 DWT) since they are not able to transitthe Suez. LNG Tankers use the value of LPG carriers ($25 million). Containers are averaged for 500 TEUs, 10 years old ($6 million),2,500 TEUs, 10 years old ($23 million), and 12,000 TEU’s ($28 million). Bulk Carriers are averaged for Handysize 28,000 DWT, 10 yearsold ($20 million), Panamax 75,000 DWT, 5 years old ($25 million), and Capesize, 150,000 DWT, 5 years old ($54 million). All othership values are proxied by the average value of Container ships. All information taken from United Nations Conference on Trade andDevelopment (UNCTAD), “Review of Maritime Transport, 2011”, November 23, 2011.46 Information on premium rates, and available reductions was obtained from discussions with marine insurance industryrepresentatives.47 As per the following section on the cost of security and armed guards, we have estimated that around 25% of vessels purchasedprivate armed security in 2011.48 Low/slow versus high/fast K&R rates are determined based on ships capable of transiting slower/faster than 20 knots, on average.Passenger ships are given the higher K&R insurance rate due to perceived higher liability, and the number of personnel on boardships. Other is assigned the average value of $10,000 (average of $7,500 and $12,500).49 Best Management Practices for Protection against Somalia Based Piracy (BMP4), Version 4, August 2011, Edinburgh, Scotland:Witherby Publishing Group.50 BMP4 recommends Concertina wire. A double roll is suggested for maximum effectiveness. It is also assumed that razor wire willneed to be replaced once annually on each ship. 18’’ of Concertina Razor Wire is sold for $159.95/box containing 5 rolls, covering 15linear feet each. See: Fence, Gate and Beyond. Available from: Cost calculation: $159.95/box containing 5 x 18” rolls x 20 (to cover 1,500 ft average ship perimeter x 2 (for double roll to achievemaximum effectiveness) x 2 (one replacement annually). See:, December 2011. Available from: Cost calculation: One electric fence charger (averaging $283.12) + 20 insulators (averaging $15.72) + 1,500ft wire ($308.94) equaling50 One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 References$906.46. It can be assumed that ships will need to replace insulators and wire once annually, making the annual cost of an electricbarrier per ship $1,529.80. Available from: www.electric-horse-fence.com53 The upper and lower ranges were created by the author’s estimation that between 5% and 15% of vessels transiting the IndianOcean utilize electrified barriers, equating to 2,123 and 6,368 vessels, respectively.54 Average of $3 and $6. $3 is the cost of one pack containing three signs, and $6 is the cost of two packs. About half of ships willpurchase two packs of signs.55 Cost calculation was developed based on 63,675 warning signs being purchased. The author assumes that all BMP-compliantvessels will purchase one pack of warning signs, and one-half of BMP-compliant ships will purchase two packs of warning signs,equaling 63,675 packs of warning signs purchased.56 Cost of acoustic devices estimated at $21,000 each. See Bykowicz, Julie, “Stinky Water Walls Sold as Pirate Shield”, Bloomberg,November 3, 2011. Available from: We estimate between 5% (lower bound) and 15% (upper bound) of vessels transiting the HRA utilize acousticdevices.57 The average width of bridge wings on commercial vessels is 130ft, and sandbag walls would need to be approximately 9ft tall. Filledsandbags are approximately 1ft tall and 1.5ft long. Thus, 1,548 filled sandbags (available for sale at $0.92/bag) are needed to protectthe bridge wing of one vessel.58 Information on Flag States permitting private armed security compiled from: Osler, David, “India Opens Way to Developing ArmedAnti-Piracy Guards”, Lloyd’s List, August 31, 2011. Available from:; Corbett, Adam, “Japan Considers Guards on Ships”, Trade Winds, September 9, 2011, Vol. 22(36), 19; Osler, David, “Spain toPermit Heavy-Calibre Machineguns for Defence Against Pirates”, Lloyd’s List, September 30, 2011. Available from:; Leander, Tom, “State Department Insists on Guards for US Vessels”, Lloyd’sList, July 25, 2011. Available from:; Matthews, Steve, “UKGovernment Intends to Allow Armed Guards Onboard Ships”, Lloyd’s List, July 18, 2011. Available from:; “REFILE - Germany Wants Armed Guards on Europe Ships-Official”, Reuters, August 23,2011. Available from:; Kurup, N.K., “Govt to DeployArmed Guards on Board Cargo Vessels”, Hindu Business Line, May 24, 2011. Available from:; “British Prime Minister Authorizes Armed Anti-Piracy Teams onUK-Flagged Ships”,GCaptain, October 30, 2011. Available from: “As Piracy Rises, Shipowners Harden Fleets, Hire Guards”, CNBC, April 18, 2011. Available from:; “Piracy: IMO Guidelines on Armed Guards on Ships”, BBC News, May 21, 2011. Available from: According to the Catlin Group, the average cost of four armed guards is between $30,000 to $40,000. See Catlin Group Limited,Piracy 2011: A Growing Menace, September 2011. Available from: A South African securityfirm, Specialist Maritime Services, charges up to $5,000 a day for four guards (i.e. approximately $35,000 per transit); According toan article in The Economist, a four person team can cost as much as $100,000 per voyage. See Civil-Military Fusion Center: Rinehard,Britta, “Armed Guards on Merchant Vessels”, November 2011. Available from: See also “Bona FidePrivate Security Firms to Become Recognized”, TankerOperator, May 20, 2011. Available from: Protection Vessels International (PVI), the largest supplier of armed security against piracy charges a flat rate, with an average costof $50,000 per voyage. See Arnsdorf, Isaac, “Ex-Marines Fighting Pirates Off Africa as World Shipping Lanes Attacked”, Bloomberg,October 18, 2011. Available from:; See also “Pirates…What Arrr They Good For?”,Poten Tanker Market Opinions, October 7, 2011. Availablefrom: Information based on conversations with shipping companies and leading private armed security providers. The figure of 25% isalso supported by a document published by the UK House of Commons in January 2012, stating that between 15% and 25% of shipscarry armed guards. See UK Parliament, House of Commons Foreign Affairs Committee, Piracy off the Coast of Somalia: Tenth Reportof Session 2010-12 p.12, January 5, 2012; See also Bockmann, Michelle Wiese, “Somalia Piracy Spurs Private Navy to Start Within FiveMonths”, Bloomberg, November 8, 2011. Available from: SAMI Membership Fee Schedule, October 2011. Available from: Earth Future Foundation 51
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 References64 In previous years, a number of reports have stated that major shipping companies such as AP Moller-Maersk, Frontline, and Odfjellshipping group were re-routing tankers around the Cape of Good Hope to avoid the piracy high risk area. See “Odfjell to Avoid Gulfof Aden Due to Piracy Threat”,, November 17, 2008. Available from:; “Frontline Could Follow Odfjell Lead and Steam Around the Cape to AvoidPiracy Attacks”, Ship Management International, November 18, 2008. Available from: Sand, Peter, “Need for Rethinking When to Sail Around the Cape of Good Hope to Avoid Piracy? - UPDATE3”, BIMCO, March 3, 2011.Available from: 66 Suez Canal revenues are accrued from fees collected from ships transiting the Suez Canal.67 “Albuquerque Express: First Half of 2011 Brings Record Revenue for Suez Canal Authority”, Egypt Business Directory, August 4, 2011.Available from: Sand, Peter, “Need for Rethinking When to Sail Around the Cape of Good Hope to Avoid Piracy? - UPDATE3”, BIMCO, March 3, 2011.Available from: AIS images are taken from November 17, 2009 and November 21, 2011.70 Sincere appreciation to SpaceQuest for providing this report with the associated Automatic Identification System (AIS) image.71 BIMCO Piracy Cost Calculator. Excel spreadsheet available from: The report attempted to assess the number of ships re-routing through various means, including analyzing data on the trends inships transiting the Suez Canal, as well as analyzing AIS data on shipping trends. No significant patterns could be inferred from theSuez traffic figures. The limitation with using AIS data was that many ships will turn their AIS technology off when transiting the HRA.73 Best Management Practices for Protection Against Somalia Based Piracy (BMP4) p.7, §3.4. Version 4, August 2011, Edinburgh,Scotland: Witherby Publishing Group. “Best Management Practices for Protection Against Somali Based Piracy”, Section 3.4, page 7.74 Arnsdorf, Isaac, “Maersk Says More Ships May Cut Speed for Fuel,” Bloomberg, October 4, 2011,. Available from: “’Slow Steaming’ Transport Ships: Better for the Environment and Better for Business”, EnergyBoom, February 17, 2010. Availablefrom: Murray, Martin, “Why Are Cargo Ships Sailing So Slow?”,, January 28, 2011. Available from: It should be noted that many vessels travel in convoys through the Internationally Recognized Transit Corridor (IRTC), and thiswould affect the transiting speed of ships. However, industry representatives have informed us that ships can be ordered in convoygroups according to their size and speed, allowing them to maintain higher speeds through the IRTC.78 In the section on re-routing, we estimated that 30% of tankers did not transit the Indian Ocean, and therefore were not subject tore-routing. This figure was higher for tankers than container ships given the large volumes of oil being transported from the Gulf.79 This figure includes individuals taken captive in both 2010 and 2011. It does not account for unreported vessels, the inclusion ofwhich would likely increase both the number held hostage and killed.80 Compass Risk Management: Edwards, Leslie, & Lee, Jon, Somali Piracy – Crew Fatalities: 2007 – 2011, October 31, 2011. Availablefrom: Note: In addition to the 22 reporteddeaths in 2011 (January-October) by Compass Risk Management, this analysis includes 2 seafarers reported to have died from theAsphalt Venture based on numbers from EUNAVFOR Pirated Vessels Update for January 16, 2012.81 For an in-depth analysis of the human cost of Somali piracy, see Oceans Beyond Piracy: Hurlburt, Kaija, The Human Cost of SomaliPiracy, June 6, 2011. Available from: U.K. P&I Club, Revision of the IBF High Risk Area in the Gulf of Aden and Indian Ocean, March 25, 2011. Available from: Global Institute of Logistics, “The Crew Welfare Initiative Debuts in Manila,” February 12, 2009. Available from:; Philippine Information Agency, “Threats of Piracy Beset Maritime Industry, FilipinoSeafarers,”, September 26, 2011. Available from: Travel through the HRA is calculated based on 2,415nm from Galle, Sri Lanka to the furthest attack in the Red Sea (a bit further iffollowing the IRTC). Time to transit ranges from six days seven hours (if travelling at 16 knots) to seven days 18 hours (if travelling at13 knots).85 Wages account for 35% of average operating costs, which are $6,000 per day. See “MarAd Highlights the Difference between USand Foreign-Flagged Fleets,” MaritimeProfessional, November 9, 2011. Available from: One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 ReferencesMartin-Rushmere/November-2011/MarAd-highlights-the-cost-differences-between-US-a.aspx.86 MacAskill, Andrew & Karthikeyan Sundaram, “India Fights Lloyd’s Expanding Piracy Zone After 300-Fold Insurance Jump”,Bloomberg, June 2, 2011. Available from: This analysis estimates that 30% of vessels provide hazard pay. While more ship owners likely provide hazard pay, the estimate isbased on two key data points: a) approximately 10% of the hijacked vessels were signed onto the ITF Agreement according to the ITFwebsite and b) approximately 20% of seafarers aboard the hijacked vessels were Filipino.88 Prosecutions data compiled from: United Nations Office on Drugs and Crime (UNODC), Counter-Piracy Programme, Issue Six, June11, 2011. Available from:; “Deadly Yemen CatamaranRaid ‘Pirates’ Sent to France: Source”, December 6, 2011. Available from:; Cuthbert, Jon, “10 Somali PiratesGet that Sinking Feeling”, Arabian Supply Chain, November 2, 2011. Available from:; “Somali Pirates Nabbed off Gujarat Coast”, Rediff News, June 20, 2011. Availablefrom:; Machuhi, Eunice, “24 PirateSuspects Due in Kenyan Court”, June 21, 2011. Available from:;Mohamed, Kassim, “Somali Pirates Sentenced to Five Years in Prison by Kenyan Court”, Radio Netherlands, September 8, 2010.Available from:; “South Korea Jails SomaliPirate for 15 years”, AFP, June 1, 2011. Available from:; Lee, Robert, “Court to Open Trial of Somali Pirates”,Korea Herald, May 22, 2011. Available from:;“Somalis Accused of Piracy are Flown to South Korea”, BBC News, January 29, 2011. Available from:; “S. Korean Appeals Court Demand Life Imprisonment for Somali Pirates”, Xinhua News, August 22,2011. Available from:; “Malaysia Charges 7 Somalis for Piracy,” ChannelNews Asia, February 11, 2011. Available from:;“Somali ‘Pirates’ Charged in Malaysia”, BBC News, February 11, 2011. Available from:; “Somali Pirates Jailed in Netherlands for Choizil Hijack”, BBC News Africa, August 12, 2011. Available at:; “Netherlands Jails Somali Pirates”, ITF Seafarers, August 19, 2011. Available from:; “Ten Somali Pirates Sentencedto Life Imprisonment”, Gulf News, November 2, 2011. Available from:; “Somaliland: Somali Pirates Receive 8 Years Prison Terms,” Somaliland Press, December4, 2011. Available from:; “Seychelles JailsFive Somalis for Piracy”,, July 1, 2011. Available from:; Dickson, Caitlin, “Is It Worth It to Try Somali Piracy?” Atlantic Wire, February 23, 2011.Available from:; AFP, “Spanish NavyArrests 11 Suspected Somali Pirates”, MSN News, March 29, 2011. Available from:; AP, “Spain Jails Pirates for 439 Years”, Herald Sun, May 4, 2011. Available from:; Ng’wanakilala, Fumbuka, “TanzaniaaArrests 7 Pirates After Attack on Oil Vessel”, Reuters, October 4, 2011. Available from:; House Foreign Affairs Committee, Subcommittee on Terrorism, Nonproliferation, andTrade: Statement of Andrew Shapiro, Confronting Global Piracy, U.S. Department of State, June 15, 2011. Available from:; “Somali Gets 25 Years in US Prison for Piracy”, AFP, April 7, 2011. Available from:; “Tough Sentences for Somali ‘Pirates’ Urged”, AFP, November 28, 2011. Available from:;Thomas, Annie, “Somali Pirates Jailed from French Kidnapping”, AFP, November 30, 2011. Available from: Countries include: Australia, Canada, Denmark, European Union, United Kingdom, and United States. See, e.q., “Denmark,Seychelles in Deal to Prosecute Pirates”, Reuters, May 25, 2011. Available from: The Secretary-General of the United Nations, Report of the Secretary-General on the Modalities for the Establishment ofSpecialized Somali Anti-Piracy Courts, U.N. Document S/2011/360, June 15 2011. Available from: Lang, Jack, Report of the Special Adviser to the Secretary-General on Legal Issues Related to Piracy off the Coast of Somalia, U.N.One Earth Future Foundation 53
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 ReferencesDocument S/2011/30, January 24, 2011.92 Lang, Jack, Report of the Special Adviser to the Secretary-General on Legal Issues Related to Piracy off the Coast of Somalia, U.N.Document S/2011/30, January 24, 2011.93 Xinhua News, “UN Security Council Urges Member States to Criminalize Piracy”, Shanghai Daily, October 25, 2011. Available from: “Ten Somali Pirates Sentenced to Life Imprisonment”, Gulf News, November 2, 2011. Available from: House Foreign Affairs Committee, Subcommittee on Terrorism, Nonproliferation, and Trade: Statement of Andrew J. Shapiro,Confronting Global Piracy, U.S. Department of State, June 15, 2011. Available from:;“Somali Gets 25 Years in US Prison for Piracy”, AFP, April 7, 2011. Available from: “South Korea Jails Somali Pirate for 15 Years”, AFP, June 1, 2011. Available from:; Lee, Robert, “Courtto Open Trial of Somali Pirates”, Korea Herald, May 22, 2011. Available from:; “Somalis Accused of Piracy are Flown to South Korea”, BBC News, January 29, 2011. Available from:; UNODC, Counter-Piracy Programme: Support to the Trial and Related Treatmentof Piracy Suspects, Issue Six, June 2011. Available from:; Xinhua News, “S. Korean Appeals Court Demand Life Imprisonment for Somali Pirates”, People’s Daily Online, August 22, 2011.Available from: Accounts for 831 total suspects in Africa, less 207 suspects from Kenya and the Seychelles.98 African imprisonment costs taken from South African cost estimates. See “South Africa: Prisons Filled to Bursting Point”, The RealCost of Prisons Weblog, January 2006. Available from: Being for Oman (13), Somaliland (6), Tanzania (6).100 No direct information on the cost of trials was available for Africa. The marginal cost of a trial is the time of employees(prosecutors, judges, and prison staff). As such, only the salaries of the staff are accounted for. Since imprisonment costs arebased on South African costs, the trial cost is also based on South Africa. Using data from South Africa’s Department of Justice andConstitutional Development, we calculate the total expenditure incurred for ‘compensation of employees’. Department of Justiceand Constitutional Development, Republic of South Africa, Annual Report 2010/11, August 21, 2011. Available from: Available from: Using the conversion rate as of 12/14/2011, 1 SA Rand=0.1185 USD.The total expenditure on employee compensation according to the Department’s report is $337,949,558. The conviction rate in SAis, on average, 12%. See Steenkamp, Lizel, “Concerns over Conviction Rate”, News24, October 14, 2009. Available from: The European Institute for Crime Prevention and Control(HEUNI) reports that South Africa has 348 prisoners per 100,000 population. European Institute for Crime Prevention and Control,International Statistics on Crime and Justice 2010 p.164, 2010. Using the total population of South Africa (49,004,031), this equatesto 170,534 prisoners in South Africa (384/100,000*49,004,031). With a conviction rate of 12% (number convicted/no tried*100 =12).This makes the total number of trials 1,421,116. Since the total employee expenditure is $337,949,558, the expenditure per trial isaround $337,949,558/number of trials, or $337,949,558/1,421,116 = $238.101 Asia imprisonment costs taken from Indian cost estimates. See National Crime Records Bureau, Snapshot 2009. Available from: Being for India (146), and Korea (5)103 Using Indian Estimate of Rs.400,000 for cost of trial per suspected pirate. Cost Includes state appointed defense counsel fees,prosecution fees, cost of evidence and witnesses, and escort charges to and from the courts. Exchange rate calculated on December 7,2011. Information received from Indian prison authorities.104 According to a Commission Staff Working Document of the European Union, on average, it costs approximately 3,000 eurosto keep a person in prison per month, ie. 36,000 euros per year. This translates to $48,187: Foreign currency exchange made onDecember 9, 2011. See Commission Staff Working Document: Accompanying Document to the Proposal for a Council FrameworkDecision on the European Supervision Order in Pre-Trial Procedures Between Member States of the European Union, {COM(2006)468 final}, Impact Assessment Summary, E.C. Document SEC 2006 1080, August 29, 2006. Available from: France (6), Germany (10), Netherlands (10), Spain (2).106 The trial of pirate suspects in Germany was estimated to cost at least 500,000 euros. We therefore hypothesize that the costsper trial are at least 50,000 euro per suspect, or $66,927. Foreign currency conversion made on December 9, 2011. See Lakotta,Beate, “German Justice Through the Eyes of a Somali Pirate”, Spiegel Online, July 4, 2011. Available from: One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Referencesinternational/world/0,1518,755340,00.html.107 North American imprisonment costs taken from U.S Federal Prison cost estimates. See Federal Bureau of Prisons, “AnnualDetermination of Average Cost of Incarceration”, 76 Fed. Reg. 57081, September 15, 2011. Available from: According to research by a team at Iowa State University, the average ‘justice’ costs of a murder trial in the US is $307,355.Although not all piracy trials in the US are with associated murder trials, given the complexity of piracy trials in the US, as well asgeneral lack of precedent, we estimate that the costs of piracy trials are likely to be on the upper end of the cost spectrum (as are thecost of murders). See DeLisi, Matt et al, “Murder by numbers: monetary costs imposed by a sample of homicide offenders”, Journal ofForensic Psychiatry & Psychology, Vol. 21 (4), 501-513, August 2010.109 EUNAVFOR, Operation Atalanta, Media Information, November 3, 2011.110 Bockmann, Michelle Wiese, “Piracy Insurance Costs Shipowners $120M”, Bloomberg, June 27, 2011. Available from: Osler, David, & McMahon, Liz, “Naval Support for Anti-Piracy Fight Set to Decrease”, Lloyd’s List, October 10, 2011. Available from: According to Major General Howes, as many as 83 frigates and destroyers equipped with helicopters would be needed to provide a30 minute response time to protect vessels from pirates operating in such a large expanse of ocean.113 Wallis, Keith, “China May Have to Pick Up the Slack on Piracy”, South China Morning Post, November 4, 2011. Available from: Wallis, Keith, “China May Have to Pick Up the Slack on Piracy”, South China Morning Post, November 4, 2011. Available from: Saul, Jonathan, “Ship Industry Urges UN to Create Anti-Piracy Force”, Reuters, September 9, 2011. Available from: Information taken from EUNAVFOR, Operation Atalanta, Media Information, November 3, 2011117 This budget is shared between EU member states based on their Gross Domestic Product (GDP). It covers the financing of commoncosts such as costs for the operational headquarters (in Northwood, U.K.) and the force headquarters (onboard the Flagship vessel),medical services and transport. Note that this figure does not include the staffing costs of the missions, which is generally covered bycontributing nations (for example, countries pay the staffing costs of their national personnel working at operational headquarters).118 (EUR 8.05 million). Currency conversion made on November 18, 2011.119 Since data was not available for the administrative costs of NATO’s Operation Ocean Shield or CTF 151, we have estimated thattheir administrative budgets are approximately half that of EU Operation Atalanta.120 For further information on CTF 151, see CTF-151:Counter-Piracy, For information on range, fuel capacity, and cruising speed of Oliver Hazard Perry Class (Frigate) see The FFG 7 OLIVER HAZZARDPERRY–Class. Available from: For information on range and cruising speed of Arleigh Burke Class (Destroyer) see DDG-51 Arleigh Burke Specification, July 7,2011. Available from: For information on range and cruising speed of Qinghaihu Supply Ship (Auxiliary) and INS Sukanya Patrol Ship (Auxiliary) see EricWertheim, The Naval Institute Guide to Combat Fleets of the World, Their Ships Aircrafts and Systems, 15th Edition, Annapolis, MD:U.S. Naval Institute, 2007.124 For information on range and cruising speed of P3-C Orion (aircraft) see P-3C Orion Long Range ASW Aircraft, U.S Navy Fact File.Available from:; For information on range and cruisingspeed of Galicia Class Amphibious Ship (Spain) see Background - Sealifter Comparisons - Rotterdam Class LPD, Canadian AmericanStrategic Review, Available from: Congressional Research Service: Haddal, Chad C., & Gertler, Jeremiah, Homeland Security: Unmanned Aerial Vehicles and BorderSurveillance, CSR Report RS21698, July 8, 2010. Available from: Ukman, Jason, “U.S. Military Drone Crashes in Seychelles,” Washington Post, December 13, 2011. Available from: “MQ-9 Reaper,” U.S. Air Force, January 5, 2012. Available from: DoD’s Role in Helping Secure the Southwest Border, United States Government Accountability Office, Washington, D.C. (GAO-11-856R). Available from: Unmanned Aerial Vessels,, March 1, 2010. Available from: Funds are dedicated to assist Mauritius in implementing the short term assistance package worked out betweenthe EU and Mauritius for the prosecution of pirates in Mauritius. See “Mauritius and EU agreement on Somali pirateprosecution”,, July 16, 2011. Available from: Earth Future Foundation 55
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Referencesmauritius-and-eu-agreement-on-somali-pirate-prosecution/.131 1.08 million Euro: Foreign currency exchange calculation made on November 7, 2011.132 “DP World Commits US$500,000 to Long Term Public Private Efforts to Combat Piracy”, Dubai World Media Centre, April 18, 2011.Available from: United Arab Emirates, Ministry of Foreign Affairs, “UAE Donates $1 million to the UN’s International Counter-Piracy Trust Fund”,April 20, 2011. Available from: Id.135 Id.136 Id.137 Id.138 United Nations Office on Drugs and Crime (UNODC), Trust Fund to Support the Initiatives of States to Counter Piracy off the Coastof Somalia, retrieved June 9, 2011, The Secretary-General of the United Nations, Report of the Secretary-General on the Modalities for the Establishment ofSpecialized Anti-Piracy Courts, U.N. Document S/2011/360, June 15, 2011. Available from: Contact Group on Piracy off the Coast of Somalia (CGPCS), The Trust Fund to Support Initiatives of States Countering Piracy off theCoast of Somalia, Meade, Richard, “Anti-Piracy Fund Poised to Run Out of Money Soon”, Lloyd’s List, April 19, 2011. Available from:; The Secretary-General ofthe United Nations, Report of the Secretary-General on the Modalities for the Establishment of Specialized Somali Anti-PiracyCourts, U.N. Document S/2011/360, June 15, 2011. Available from: £5.3 million was allocated to regional capacity for piracy prosecutions and imprisonment in Somalia, Kenya, and the Seychelles. InOctober, an additional commitment of £2.25 million was made to further support UNODC work in Mauritius, the Seychelles, Tanzania,and Somalia. UK Mission to the United Nations, “Foreign Secretary Announces UK Funding to Tackle Piracy in Indian Ocean”, March22, 2011. Available from: £7.55 million: foreign currency exchange calculation made on November 17, 2011.145 UNODC, Funds and Partners, figures updated February 14, 2011, UNODC, Counter-Piracy Programme: Support to the Trial and Related Treatment of Piracy Suspects, Issue Six, June 2011. Availablefrom: Available from:; UK Parliament, Foreign AffairsCommittee: Written evidence from Henry Bellingham MP, Piracy Off the Coast of Somalia, July 21, 2011. Available from: “Somaliland Warns Will Not Take in Foreign-Seized Pirates”, AFP, March 29, 2011. Available from: U.K. Parliament, Foreign Affairs Committee: Written evidence from Henry Bellingham MP, Piracy Off the Coast of Somalia, July21, 2011. Available from:; Seealso UNODC, Counter-Piracy Programme: Support to the Trial and Related Treatment of Piracy Suspects, Issue Five, February 2011.Available from: See further information on the Contact Group on Piracy off the Coast of Somalia at: Contact Group on Piracy off the Coast of Somalia, Working Groups, We have estimated this cost based on the travel (flights) and accommodation for 17 meetings. For each meeting, we estimated thegeographical representation of attendees at each meeting, and therefore the average cost of flights from that region, to the locationwhere the meeting is held. All flight costs were estimated based on the cost of an economy ticket. Since many attendees may travelin business class, this estimate is a lower bound estimate. We also calculated the average cost of a hotel for one night for all locationsexcept for the Seychelles and Egypt, where it was estimated that accommodation was covered for two nights. For flights we have to assess average prices. For accommodation, we have used estimates based on the U.S. State Department traveladvisory for non-USA destinations:; and Priceline for USA destinations (Washington DCand New York): Please contact the author for a more detailed copy of the calculations.152 Including preparatory meetings to launch WG5 in 2011.153 In September 2009, Japan had also committed $13.6 million. See International Maritime Organization, Status of theImplementation of the Djibouti Code of Conduct, July 21, 2011. Available from: One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 ReferencesDocuments/Djibouti%20Code%20Update.pdf.154 “Saudi Arabia Combats Piracy By Giving Boost to IMO Djibouti Code Trust Fund”, Maritime Executive, September 21, 2011. Availablefrom: International Maritime Organization, Status of the Implementation of the Djibouti Code of Conduct, July 21, 2011. Available from: “Saudi Arabia Combats Piracy By Giving Boost to IMO Djibouti Code Trust Fund”, Maritime Executive, September 21, 2011.Available from: “Saudi Arabia Combats Piracy By Giving Boost to IMO Djibouti Code Trust Fund”, Maritime Executive, September 21, 2011.Available from: For further details on UNDP Somalia, see £200,000: Foreign currency exchange calculation made on November 8, 2011.160 Bellingham, Henry (MP, Foreign Office Minister), Speech to the British Chamber of Shipping: Tackling piracy: UK Governmentresponse, October 12, 2011. Available from: The Secretary-General of the United Nations, Report of the Secretary-General on the Modalities for the Establishment ofSpecialized Somali Anti-Piracy Courts, U.N. Document S/2011/360, June 15, 2011. Available from: This amount is not included in the final cost of piracy, as it is captured under the Trust Fund budget detailed earlier.163 United Nations Security Council Resolution 1976, U.N. Doc. S/RES/1976, April 11, 2011. Available from: For further information on Save our Seafarers see £116,250: Foreign currency exchange calculation made on November 8, 2011.166 Save our Seafarers, Untitled Presentation. Available from: Also on filewith author.167 For further information on MPHRP, see For a list of 2010 International Transport Workers’ Federation grants awarded, see ITF Seafarers’ Trust, Trust Annual Reports, Id.170 For further details on Seaman’s Church piracy study see Seaman Church Institute, Post Piracy Trauma Assessment and Treatment, Available from: See further information on the PiraT project see 33,000 Euros per year: Foreign currency exchange calculation made on November 8, 2011.174 See further details on Oceans Beyond Piracy see Phone interview with Mr. Stephen Mbithi, Chief Executive of the Fresh Produce Exporters Association of Kenya, October 31, 2011.176 Gettleman, Jeffrey, “Somali Gunmen Attack British Tourists in Kenya”, New York Times, September 11, 2011. Available from: Sayare, Scott, “Frenchwoman Abducted in Kenya Dies”, New York Times, October 19, 2011. Available from: Foreign and Commonwealth Office, Travel & Living Abroad: Kenya, Updated January 25, 2011. Available from:; U.S. Department of State, “Travel Warning:Kenya”, Travel.State.Gov, November 4, 2011, Available from:; FrenchEmbassy in Nairobi, “Travel Advisory: Lamu Archipelago”, October 2, 2011. Available from:; Foreign Affairs and International Trade Canada, “Travel Report: Kenya”, January 27, 2012. Available from:; New Zealand Ministry of Foreign Affairs and Trade, “Kenya”,, January 13, 2011. Available from:; AustralianGovernment, Department of Foreign Affairs and Trade, “Kenya”,, January 27, 2012. Available from: World Bank Group, Report: International tourism, Number of Arrivals. Retrieved July 13, 2011 from World DataBank. Availablefrom: Earth Future Foundation 57
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 Referencesand Figures ; Kenyan Ministry of Tourism, Facts and Figures: Tourism Performance Overview 2010, last accessed July 13, 2011, The assumptions are drawn from UNODC & the Caribbean Region of the World Bank, Crime, Violence, and Development: Trends,Costs, and Policy Options in the Caribbean, March 2007. Available from:; Tilson,D.J and Stacks, D.W, “To Know Us Is to Love Us: The Public Relations Campaign To Sell a ‘Business-Tourist-Friendly’ Miami,” PublicRelations Review, Vol. 23 (2), 95-115, June 1997.181 EUNAVFOR, Mission, last accessed December 14, 2011, Nairobi has grown into the epicenter for regional NGO headquarters, including a huge United Nations compound employing over1,000 personnel. A number of other well-known non-profit, global health and government transparency organizations also houseregional headquarters in Nairobi, employing large numbers of expatriates.183 Essa, Azad, “Dadaab, the World’s Biggest Refugee Camp”, Al Jazeera, July 11, 2011. Available from:; United Nations High Commissioner for Refugees (UNHCR), “Briefing Notes:UN High Commissioner for Refugees applauds Kenya’s Decision to Open Ifo II Camp”, July 15, 2011. Available from: Pflanz, Mike, “Aid Workers Evacuated After Colleagues Abducted in Kenya”, Telegraph, October 15, 2011. Available from: “East Africa drought: Cholera outbreak in Kenya camp”, BBC News, November 15, 2011. Available from: U.S. Department of State, Bureau of African Affairs, “Background Note: Republic of Kenya”, January 18, 2012. Available from: Calculated from United Nations, Cost-of-Living Survey Report, Nairobi, Kenya, October 2011. Available at Per capita GDP (PPP) in Kenya is $1,750.84. See International Monetary Fund, World EconomicOutlook Database, September 2011. Available from: Central Intelligence Agency, The World Factbook, last accessed December 16, 2011,; National MaritimeFoundation, Making Waves: Monthly e-News Brief, August 2011, Vol. 6(08). Available from:’11[1].pdf.189 MacAskill, Andrew & Sundaram, Karthikeyan, “India Fights Lloyd’s Expanding Piracy Zone After 300-Fold Insurance Jump”,Bloomberg, June 2, 2011. Available from: Id.191 Indian Navy, Anti Piracy Operations, last accessed December 16, 2011, Trade data retrieved from United Nations Commodity Trade Statistics Database, 2010. Availalble from: 70% of $220,408,495,991 = $154,285,947,194, and 52% of $154,285,947,194 = $80,228,692,540 (seaborne exports). Similarly, 70%of $268,629,377,078 = $188,040,563,955, and 52% of $188,040,563,955 = $97,781,093,256 (seaborne imports). Total seaborne trade= $97,781,093,256 + $80,228,692,540 = $178,009,785,796.194 Major trading partners in East Asia like China and Singapore are ignored as trade with these countries is unlikely to transit throughthe Indian Ocean.195 Calculated based on the fact that 70% of trade in value is seaborne and 52% of seaborne trade is through the west coast. Tradedata retrieved from United Nations Commodity Trade Statistics Database, 2010. Available from: A flammable block used as fuel in a fire.197 It takes up to five additional days for vessels to reach India from South Africa. Cowhig, Jackie & Saul, Jonathan, “Piracy Spurs IndiaCoal Buyers to Diversify”, Reuters, April 17, 2011. Available from:,2&so=9999.198 Trade data retrieved from United Nations Commodity Trade Statistics Database, 2010. Available from:,2&so=9999.199 Cowhig, Jackie, “Interview: Piracy May Curb India’s S.Africa Coal Imports - Adani”, Reuters, March 9, 2011. Available from: Cowhig, Jackie, & Saul, Jonathan, “Piracy Spurs India Coal Buyers to Diversify”, Reuters, April 17, 2011. Available from: One Earth Future Foundation
  • THE ECONOMIC COST OF SOMALI PIRACY, 2011 References201 Prosser, Marc, “Britvic Warns of Rising Commodity Costs”, Financial Times, February 24, 2011. Available from: Cowhig, Jackie, “Interview: Piracy May Curb India’s S.Africa Coal Imports - Adani”, Reuters, March 9, 2011. Available from: Similarly, a Canadian company, Fairmont Shipping,makes about ten trips to India per year, and claims that Somali piracy is costing the company approximately $2 million per year.203 Edwards, Leslie, & Lee, Lee, “Somali Piracy – Crew Fatalities,” Compass Risk Management, October 31, 2011. Available at: Note: In addition to the 22reported deaths in 2011 (January-October) by Compass Risk Management, this analysis includes 2 seafarers from the Asphalt Venture,reported to have died based on numbers from EUNAVFOR Pirated Vessels Update for January 16, 2012.204 Two of the original crewmembers are reported to have died during captivity.205 International Maritime Bureau Piracy Reporting Center (IMB PRC), Annual Report 2011, January 2012.206 The Nigerian risk zone now extends to 200 nautical miles offshore. Bockmann, Michelle Wiese, “Piracy Spurs Insurers to ExtendNigeria War-Risk Zone, Add Benin”, Bloomberg, August 4, 2011. Available from: Saul, Jonathan, & John, Mark, “Analysis: Pirates Eye Share of Gulf of Guinea Riches”, Reuters, July 29, 2011. Available from: Central Intelligence Agency (CIA), “Nigeria”, World Fact Book, November 10, 2011. Available from: Sudan is the only major oil exporter that is located in Eastern Africa.210 “Somali Piracy is a ‘Threat to Global Oil Supplies’”, DefenceWeb, February 11, 2011. Available from:;Bockmann, Michelle Wiese, “Pirates May Target Hormuz Tankers in Monsoons, Risk Adviser AKE Group Says”, Bloomberg, June 15,2011. Available from: The Economist Intelligence Unit, The GCC in 2020: Outlook for the Gulf and the Global Economy, March 2009. Available from: “GPCA seeks more measures to stem attacks of pirates”, Saudi Gazette, November 14, 2011. Available from: Data for the graph on ‘Cost of Piracy vs Other Indicators’ is compiled by the authors. The estimated GDP of Somalia in 2010 was$5.896 billion 2010. See The Central Intelligence Agency, “Somalia”, World Fact Book, 2011,; Norris, John, & Bruton, Bronwyn, “Twenty Years of Collapse and Counting The Cost of Failure inSomalia,” Center for American Progress and One Earth Future Foundation, September 2011. Available at: See United Nations Conference on Trade and Development (UNCTAD), Review of Maritime Transport, 2011, November 23, 2011.The hull value of the Aframax tanker is not attributable to UNCTAD’s data, and is taken from the estimate earlier in this report of$44,000,000.215 Distances calculated using Updated for average bunker price in 2011. Bunker Index NWE: December 2011. Available from: United Nations Conference on Trade and Development (UNCTAD), Review of Maritime Transport, 2011, November 23, 2011.218 Lorentzen & Stemoco AS, Weekly 21.2011, Available from: See Arnsdorf, Isaac, “Maersk Says More Ships May Cut Speed for Fuel”, Bloomberg, October 4, 2011. Available from: U.S. Energy Information Administration, International Petroleum (Oil) Prices, Available from: Whitlock, Craig, “In Tropical Paradise, U.S. Drones Meant Revenue”, Washington Post, September 22, 2011. Available: 2010 data obtained from the World DataBank. International Tourism, Number of Arrivals, 2010. Retrieved July 13, 2011 from WorldDataBank. Available from: Id.One Earth Future Foundation 59
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